How to Book Crypto Trading Losses and Gains on Your Balance Sheets
There are currently no specific accounting standards for crypto assets. Instead, International Financial Reporting Standards and Generally Accepted Accounting Practices (GAAP) apply to cryptocurrency accounting. Balance sheets are the three most important financial reports that businesses need, along with income and cash flow reports. While the income statement shows a company’s economic activity over a period of time, a balance sheet shows its assets, equity and liabilities.
Balance sheets are another name for balance sheets, which provide a comprehensive picture of a company’s financial condition. The balance sheet also includes all journal entries made since the company’s inception. Crypto transactions should be included on the balance sheet, especially those that have a financial impact on a company.
The Importance of a Balance Sheet
Balance sheets provide valuable insight into a company’s financial health and provide key benefits. Balance sheets are usually prepared at the end of a reporting period. This allows you to compare performance from year to year. Balance sheets are a great way to measure a company’s progress and growth.
The balance sheet can also be used to calculate important financial ratios, such as the leverage ratio, which indicates whether a company can pay its debts with its equity. The balance sheet also contains information needed to calculate other important metrics such as working capital and current liabilities, and shows whether or not a company will be able to pay off its debts within a year.
Finally, balance sheets can be used to value a company. This is useful when you are looking for investors who can prove they are making a profit or when you are looking to sell your business. How should cryptocurrencies be treated on the balance sheet?
As noted, neither IFRS nor GAAP make specific references to crypto accounting. Since cryptocurrencies are assets, they must be recorded on a balance sheet. Here are a few helpful tips:
When buying cryptocurrencies with fiat currency
Trading activities in cryptocurrencies should be recorded similar to stock trading activities. If you buy Bitcoin
BTC
$25,733
Ether
Ethereum
$1,631
these digital assets may be added to the balance sheet at their fair market value at the time they were purchased.
This is shown as a debit to the asset account. Also, since the cryptocurrency was purchased with fiat currency, the cash account should also reflect the credit for the purchase price of the crypto assets purchased.
When selling cryptocurrency for fiat money
However, when selling cryptocurrency, the fiat amount received when selling the cryptocurrency is credited to the asset account and debited to the cash account.
Suppose there is a significant difference between the amount sold of the cryptocurrency and the amount paid for it (original purchase price). In this case, a capital gains account should also be credited.
Recognition of unrealized losses
Under GAAP accounting principles for intangible assets, impairment losses cannot be reversed even if the asset recovers from previous price levels. If a company buys BTC with a fair value of $500,000, which then falls by $100,000, the company needs to recognize this loss and reduce its cryptocurrency holdings to reflect the fall in value.
This applies even if the fair value later increases to $600,000. The loss can neither be reversed nor increased on the balance sheet. Under GAAP guidance, the impairment value (in this scenario) remains at $400,000.
Cryptocurrency Mining Earnings Recognition
Cryptocurrency mining companies are required to report cryptocurrency profits on their balance sheet like other revenue-generating activities. This means that the credit will be applied to their mining income account. The newly generated digital asset must then be recorded on their books at the fair market value of the asset.
Expenses incurred during mining operations must also be considered. For example, if cash is spent to pay mining costs, the cash account must be credited. The appropriate asset account is then debited (purchase of mining equipment that needs to be capitalized and depreciated) or otherwise recognized as an expense for things like supplies and working capital.
Using cryptocurrency to pay suppliers
Using cryptocurrency to pay a supplier or seller is considered a disposal and should therefore be recorded in the same way as selling the cryptocurrency (i.e. crediting the asset). Therefore, a capital gain is recognized for the difference between the expense and the carrying amount of the asset.
For example, if someone owns 100 BTC, which is equal to $300,000, and the fair value of the BTC has now risen to $400,000 – but then the accounting firm that performed the audit says BTC is worth $400,000 – Pays in dollars instead of cash – the amount must be debited from your professional services account. Meanwhile, $300,000 needs to be credited to the BTC asset account. The remaining balance of $100,000 is then deposited into a capital gains account.
Cryptocurrency Taxation
Tax compliance is an essential part of cryptocurrency accounting. As already mentioned, the sale of cryptocurrencies is a capital sale within the meaning of the current wealth guidelines.
Capital Gains and Losses
Cryptocurrencies are subject to capital gains tax whenever the capital gains are greater than the price at which the cryptocurrency was purchased. However, if the proceeds are less than the purchase price, there is a capital loss. Capital losses can then be used to offset capital gains on other assets or carried over to the next financial year. In any case, it can reduce the tax liability.
Income Tax Liability
If someone is paid in cryptocurrencies like BTC or ETH, they are subject to income tax. The market value of the cryptocurrency at the time of the transaction should be used to factor this into trading profits. Companies also have to pay corporation tax on these profits.
