Crypto Accounting Success - 10 Steps to Do it Right
It comes as no surprise that the ever-evolving regulatory environment and volatile nature of crypto assets create complexity in crypto accounting. Yet, accurate and compliant financial reporting is essential for businesses navigating the digital asset market.
In our expert guide, we’ll walk you through 10 key steps to better understand crypto accounting, what creates crypto taxable events, and how to manage accurate crypto record keeping, with insights grounded in Generally Accepted Accounting Principles (GAAP).
1. Understanding Crypto Assets Classification
The regulation of cryptocurrency is significantly influenced by the classification of digital assets, making it important for businesses to understand how these assets are categorized. Proper classification ensures compliance with financial reporting standards, optimizes tax obligations, enhances risk management, supports strategic decision making, and reinforces trust with stakeholders—all critical components for successful crypto accounting management.
Crypto assets can be classified in various ways depending on their use:
Inventory: For businesses holding crypto for resale.
Intangible Assets: For long-term investments not intended for immediate sale.
Financial Instruments: For derivatives and other complex crypto products.
GAAP Reference: ASC 330 (Inventory), ASC 350 (Intangibles), and ASC 825 (Financial Instruments).
2. Implementing Accurate Crypto Record Keeping Systems
Accurate crypto record keeping is the foundation of successful crypto accounting. Consider integrating Use specialized software to track transactions, including purchases, sales, exchanges, and transfers between wallets.
If you are using multiple exchanges and wallets, coin tracking software can consolidate all your activities into one place, automatically generating summary reports on crypto taxable events, capital gains, income, transaction fees, and other necessary details for your annual income tax return. This can streamline your crypto record keeping, saving you hours of time spent on manual data collection and organization.
Best Practice: Use tools like QuickBooks with crypto integrations, CoinTracker, or Koinly for comprehensive tracking.
3. Valuing Crypto Assets
Given the volatility of cryptocurrencies and the day-to-day price disparities across exchanges, valuing crypto assets accurately can be challenging. It’s best to use the fair market value at the transaction date for recording purposes. Whether you’re selling crypto, trading one cryptocurrency for another, purchasing goods or services, or receiving it as income, every transaction can create a crypto taxable event.
GAAP Reference: ASC 820 (Fair Value Measurement).
Example: To follow crypto record keeping best practices, rRecord the value of Bitcoin received as payment at its market value on the transaction date.
4. Recognizing Revenue
Revenue recognition for crypto transactions must adhere to the five-step model outlined in ASC 606:
Identify the contract.
Identify performance obligations.
Determine the transaction price.
Allocate the transaction price.
Recognize revenue when performance obligations are satisfied.
GAAP Reference: ASC 606 (Revenue from Contracts with Customers).
5. Tracking Crypto Transaction Fees
Should a crypto taxable event occur, transaction fees, such as those for blockchain transactions, need to be properly accounted for. These can be recorded as part of the cost of the transaction or as an expense, depending on the nature of the transaction.
Example: Record mining fees paid during a crypto transaction as an expense under "Transaction Fees."
6. Handling Foreign Exchange
Cryptocurrencies are often traded in multiple fiat currencies, creating exposure to foreign exchange rate fluctuations. These currency movements can significantly impact the overall profitability or loss of crypto investments, thereby potentially affecting the accuracy of crypto accounting and record keeping. As a result, investors must consider not only the price volatility of the cryptocurrency itself but also be sure to record the gains and losses that arise from shifts in exchange rates between fiat currencies.
GAAP Reference: ASC 830 (Foreign Currency Matters).
7. Monitoring Internal Crypto Transfers
Internal transfers between wallets should be meticulously tracked to ensure accurate crypto record keeping and to avoid double counting or missing transactions.
Best Practice: Use blockchain explorers and accounting software that supports wallet synchronization.
8. Crypto Accounting for Staking and Mining Rewards
Income from staking and mining should be recognized as revenue at the fair market value when received, marking a crypto taxable event. Capturing the value and timing of the transaction is important for both tax reporting and financial statement efficiency, reinforcing the importance of clean crypto record keeping..
GAAP Reference: ASC 606 (Revenue from Contracts with Customers).
Example: If you receive one Ethereum as a staking reward, recognize it as revenue based on its market value at the time of receipt.
9. Reporting Unrealized Gains and Losses
Unrealized gains and losses from holding crypto assets should be reported in financial statements to reflect the current value of holdings. These fluctuations in value—although not realized through a transaction—still impact the overall financial position of the investor and should carefully be tracked as part of your crypto record keeping. While these gains and losses do not immediately trigger a crypto taxable event, they provide insights into potential future tax liabilities or opportunities, influencing strategic decision making regarding asset liquidation or holding.
GAAP Reference: ASC 320 (Investments - Debt and Equity Securities).
10. Ensuring Compliance with Regulatory Requirements
Stay updated with the evolving regulatory landscape around crypto accounting to ensure compliance with reporting and tax obligations. Regularly consult with crypto accountants and legal advisors.
Best Practice: Join industry groups and forums, and subscribe to updates from regulatory bodies like the SEC and IRS.
Next Steps
Successfully accounting for cryptocurrency transactions requires a robust understanding of both the unique challenges posed by crypto assets and the relevant GAAP guidelines. By following these 10 steps, you can ensure accurate financial reporting and compliance, paving the way for crypto accounting success.
Contact The Network Firm for expert assistance with your cryptocurrency accounting needs. Our team of professionals is dedicated to helping you navigate the complexities of crypto transactions, crypto taxable events, accurate crypto record keeping and financial reporting.
Author Bio:
Wesley Barton is an expert in bookkeeping, financial reporting, and cryptocurrency accounting. With extensive experience in the field, Wesley Barton provides valuable insights and solutions for managing crypto accounting regulations and reporting crypto transactions accurately. Connect with The Network Firm on LinkedIn or X (Twitter) for more expert advice.