When Bitcoin came to life in 2009, few people outside of computer programmers took note. But since its shadowy beginnings, the idea of cryptocurrency has gone mainstream. Despite the collapse of one of the largest bitcoin exchanges, cryptocurrencies have drawn the interest of everyone from criminals taking advantage of its anonymity to large financial institutions looking to cut international transaction costs. Cryptocurrency opened the world’s eyes to the flaws in our current system for exchanging value and keeping track of those exchanges. The blockchain technology behind Bitcoin and other cryptocurrencies is set to forever change the accounting industry.
While Bitcoin may be the most recognizable name in cryptocurrency, it is far from the only one. There are dozens of others including Litecoin, Ethereum, NEO, and Monero. Cryptocurrencies rely on the underlying technology of a blockchain. The blockchain is a record, or ledger, of every single transaction ever made. That record is shared between all users of the cryptocurrency and can only be updated by a consensus of a majority of the participants in the system. Information once entered, can never be erased.
Why Should You Invest in Cryptocurrency?
Because payments are peer-to-peer, cryptocurrency transactions have no need for intermediaries such as banks. When you receive a payment via check and try to deposit it at your bank, the bank will often hold the funds for several days while it confirms the funds are available. International wire transfers may take even longer. Cryptocurrency transactions, on the other hand, may be instantaneous or take just a few minutes to be confirmed.
Although few small businesses use cryptocurrencies regularly today, there are still key reasons why you should invest in cryptocurrency. Namely, a number of billion dollar businesses that accept Bitcoin as a form of payment include Amazon, PayPal, and the Apple Store. No doubt part of the motivation to accept cryptocurrency is lower transaction fees, which are minimal or in some cases free.
Cryptocurrency also carries a degree of anonymity. The use of credit cards requires sharing your name, address, card number, expiration date, and CSV number. Providing a paper check also provides others with your name, address, bank, and account number. Cryptocurrency doesn’t require users to give up any secret information.
Cryptocurrency & Accounting
The rapid rise of cryptocurrency left governments around the world scrambling to provide guidance in accounting for and taxing cryptocurrency transactions. Some treat it like a foreign currency, some like the exchange of a service, and others, including the US, treat it as property.
The IRS issued their first ever guidance on how virtual currency transactions will be taxed in 2014 with the release of Notice 2014-21. In the US, cryptocurrencies are treated as property for federal tax purposes and taxpayers claim either capital gains or losses on transactions. The IRS requires the value of cryptocurrency to be reported in US dollars with the fair market value determined at the time of payment or receipt. This treatment results in some specific record keeping requirements, including maintaining trading records similar to those for stocks and bonds.
New accounting tools have been developed to support the recording, reporting and accounting for cryptocurrency. For example, LibraTax is a Saas platform designed to easily connect to bitcoin wallets, automatically import transactions, and calculate gains and losses. Other platforms such as Bitpay offer payroll services in Bitcoin. With an estimated 14 million Bitcoin units in circulation and a current exchange rate of one Bitcoin at around $430 USD, that’s a collective market value of over $6 billion. That figure only includes Bitcoin, not the dozens of cryptocurrencies that have followed in Bitcoin’s wake. While Bitcoin was the first cryptocurrency to gain the public’s attention, it won’t be the last.
Blockchain boosters have compared neglecting the idea of cryptocurrency to “neglecting the idea of the Internet and the Hypertext Transfer Protocol (http) back in the early nineties.” Clearly, cryptocurrency has opened up new ways to think about everything from exchanging value to transfers of ownership. While the future of Bitcoin is far from certain, accountants need to understand blockchain technology and cryptocurrency in order to keep up with a changing industry.
There has yet to be a specific framework for cryptocurrency as laid out like the US GAAP. In the traditional sense, accounting for cryptocurrency has yet to be defined. But it seems that earlier this year, the IFRS Interpretations Committee reached tentative conclusions that accounting for cryptocurrency should follow the IFRS Standards.
Being that cryptocurrency is not a physical asset, the following standards need to be decided before cryptocurrency GAAP can be considered:
- Is cryptocurrency a cash equivalent or a foreign currency?
- Is cryptocurrency a financial instrument?
- Is it an intangible asset?
- How can it be taxed?
Top Cryptocurrency Accounting Softwares
As cryptocurrency use becomes more mainstream, the need for software specifically catered to the industry has never been greater. As the taxation requirements for cryptocurrencies is different for each jurisdiction, including certain countries that don’t tax cryptocurrencies yet, this can lead to complications. In comparison to the global cryptocurrency market, the US has one of the most advanced policies and makes it a requirement for all those involved in cryptocurrency to file taxes appropriately. To make the lives of cryptocurrency users’ easier, below are our top picks (in no particular order) for the best Cryptocurrency Accounting Software options:
1. Bitcoin Taxes
Bitcoin Taxes is one of the most flexible accounting softwares as it can be used by everyday cryptocurrency users to report income and capital gains from cryptocurrencies. The software supports a diverse range of currencies and exchanges, but might not be ideal for more advanced firms operating on cryptocurrency.
Blox is a crypto-based social trading platform that helps users manage trading portfolios, maximize profits, and reporting for taxation purposes. Blox offers a wide variety of offerings for various levels of crypto users from CEOs to Miners.
SoftLedger is a financial management platform that accommodates cryptocurrency for accounting and taxation purposes. The interface is easy to navigate while transactions are automated allowing real time tracking and on-the-go financial reports.
Gilded‘s software helps to minimize risk and improve record keeping by providing a consistent outlet for tracking and data entry. Gilded supports all of the major coins including Bitcoin, Ethereum & ERC20 tokens, and Litecoin.
ZenLedger is an accounting software for cryptocurrency with diverse features including trade history enablement, taxation, and auto-fill forms. Although it’s on the pricier end, ZenLedger provides a global solution and quality support provided by a team of leading experts.
For more on how technology is transforming accounting and finance, download our white paper Digital Dollars.