Accounting in the Cryptocurrency Ecosystem
Cryptocurrency, as we all know, has become a buzz word these days. It has mainly got this hype due to the rise in the currency value of Bitcoin, the leading cryptocurrency in the world. Cryptocurrency uses an advanced data recording mechanism called Blockchain which enables it to secure the data and along with that provide an irreplaceable accounting ledger mechanism which can’t be changed in any way.
A cryptocurrency is a digital asset designed to work as a medium of exchange using cryptography to secure the transactions and to control the creation of additional units of the currency. One of the most popular cryptocurrency is Bitcoin and now the world knows about it and accepts it as a standard mode of payment.
- Blockchain: The blockchain is a public, decentralized, distributed ledger that is capable of storing and confirming the transactions that pass through it. This means that the ledger is not owned or controlled by any one party. Each and every person using a particular cryptocurrency can access the ledger and see all the transactions carried out. Blockchain completely deletes
- Public Ledger: All the transactions from the very start is stored in the public ledger. Here public ledger means, that all the transactions are recorded in a ledger which is open for all to see and verify.
- Miners: Mining refers to the distributed computational review process performed on each “block” of data in a “block-chain”. This allows for achievement of consensus in an environment where neither party knows or trusts each other.
Accounting for Cryptocurrency:
We would take an example of the godfather of cryptocurrency, i.e. Bitcoin. Accounting for any cryptocurrency might seem a little confusing at first due to its unique digital nature. There are no such specific guidelines prepared by any country to deal with cryptocurrencies, but the US has put in place some guidelines to deal with them and they are as follows:
For federal tax purposes, Bitcoins and other cyber-currency are considered as a property. Tax principles that apply to property apply to them.
- Cryptocurrencies are NOT treated as currency to determine losses or gains under tax laws.
- Now taxpayers have to include the fair market value of the virtual currency as a taxable income when it is used as a payment medium for goods and services.
- Basically, fair market value is determined on the basis of date of acquisition and it is (virtually) exchanged for U.S. dollars for tax purposes.
- A taxpayer is liable for virtual loss or gain, for instance, if bitcoin is bought at some specific price let’s say 1000$ and any change whether it is upwards or downwards will result in a virtual gain or a virtual loss.
- Accounting related services have to keep in mind that when accepting Bitcoins as an income, they must carefully select an appropriate valuation strategy and reduce it by business expenses throughout the year.
Although Indian Accounting Body has not laid any rules or guidelines for dealing with Cryptocurrencies like Bitcoins and others, still Cryptocurrency has opened world’s eyes to the flaws our current accounting system carries. And in future, we are likely to see some specific guidelines made to deal with accounting for cryptocurrencies so that it can be included in our financial system effectively.
- Posted on Oct 10, 2017
- By Dhruv Rudani
- 0 Comments