Cryptocurrencies and Accounting: What You Need to Know as the Industry Evolves
After the value of Bitcoin skyrocketed at the end of 2017, cryptocurrencies became the center of a lot of attention. However, there is still a lot of confusion surrounding the industry, including when it comes to regulation and how best to manage them as potential assets.
Additionally, there is still a lot of doubt regarding their actual value, both as a form of currency and as a potential investment. While some cryptocurrencies are accepted as forms of payments for goods and services, the vast majority are not. Further, since speculation plays a big role in their value and a significant number have turned out to be scams, understanding the nuances of the market is critical for accounting professionals.
Understanding the Types of Cryptocurrencies
While Bitcoin is the most recognizable example of a cryptocurrency, it’s important to understand not all of the altcoins – the term that describes essentially any other cryptocurrency – act the same way. Options like Bitcoin and Litecoin are often seen as a means of storing value, not unlike gold. They are deflationary in nature as only a specific, fixed amount will ever exist.
Dash and Bitcoin Cash are focused on being payment mechanisms, concentrating on providing low transaction fees and quick payment confirmations. Ripple works more as an alternative to SWIFT payments, a form of interbank transfer, which may make it more relevant from a business perspective.
Ethereum’s ERC20 operates more like a gift card, allowing companies to raise money by selling tokens which can be exchanged for services the businesses intend to launch.
Other cryptocurrencies may fall into the above categories or in others, as the industry is still developing and the full potential of what they could do is not yet realized.
The Value of Cryptocurrencies
Any cryptocurrency’s value is effectively defined by speculators and cryptocurrency exchanges. They are often highly volatile and are not back by any product, service, commodity, or another asset.
This means the market is actually determining if any particular currency has value, as well as how much. There is an inherent level of risk in this paradigm, as many cryptocurrencies have sprung into existence only to experience a quick rise and a similarly quick fall.
Issues of Liquidity
There are approximately 200 cryptocurrencies available through reputable exchanges that can actually be exchanged for genuine cash. However, the vast majority must be converted into one of a handful of cryptocurrencies before they can be cashed out, and some require trading between multiple exchanges as well.
This means only a few cryptocurrencies are relatively liquid, including options like Bitcoin. The others can be subject to transactional and transfer delays, making them harder to convert to cash.
One of the biggest questions accountants face when dealing with cryptocurrencies circles around tax liability. Often, cryptocurrencies are treated as current assets and subject to IRS guidance related to property.
Gains and losses in crypto-to-crypto exchanges must be recorded, as well as crypto-to-cash exchanges. The official guidance from the IRS was released in 2014 but, if cryptocurrencies continue to gain in popularity, new guidelines are almost guaranteed to be on the horizon.
If you would like to learn more about how cryptocurrencies are impacting accounting, the team at VincentBenjamin can help. Contact us with your questions and concerns today and see how our industry expertise can benefit you.