How does accounting for crypto currencies work?

Accounting for crypto currencies can be confusing because there are so many aspects to consider. Like in all accounting, there is a difference between financial reporting and tax accounting. On top of that, the tax accounting rules can differ from country to country But don’t worry-we’re here to help!

Cryptocurrency accounting refers to the reporting requirements around cryptocurrencies and other virtual assets for investors and for businesses alike.

What is this blockchain that everybody talks about?

Before we get into the details, let’s consider some background, namely the technology behind it all and what makes it so useful for many applications. The blockchain is a decentralized, digital ledger of all cryptocurrency transactions. These transactions can be anything- payments, contracts, or other data. It is constantly growing as “completed” blocks are added to it with a new set of recordings. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data.

A brief history of Blockchain

Blockchain technology has been around for over a decade, with the first cryptocurrency, Bitcoin, being created in 2009. However, it wasn’t until 2013 that blockchain started to gain mainstream attention. That’s when Bitcoin reached a value of $1,000 per coin.

In 2015, the Ethereum blockchain was created. Ethereum is different from Bitcoin in that it allows for more than just financial transactions to be recorded on the blockchain. This made Ethereum a popular choice for businesses who wanted to use blockchain technology but weren’t interested in using Bitcoin.

The popularity of Ethereum led to the creation of many other cryptocurrencies, which are now collectively known as altcoins. In 2017, the total market value of all cryptocurrencies hit $100 billion and in 2021 it reached its all time high so far: $3 trillion.

What are the advantages of Blockchain?

Blockchain is unique because it allows for data to be stored and verified without a central approver- meaning there is no need for a central authority. This makes it highly secure, as it would be very difficult and expensive for someone to tamper with the data without being noticed.

The blockchain is also transparent- meaning that anyone, who wants to access the data, can do so. This makes it a great choice for businesses who want to keep track of their transactions, as well as investors who want to keep track of their portfolio.

Blockchains are also immutable, meaning that once a block has been added to the public ledger, it cannot be changed retrospecitvley. That property is useful to prove ownership or record the history of events.

What differences matter for crypto currencies?

Proof of work and proof of stake are two different ways of verifying cryptocurrency transactions. With proof of work, miners need to solve a complicated mathematical puzzle in order to verify a block of transactions. This can be resource-intensive, and requires specialized equipment.

With proof of stake, users stake their own crypto as collateral in order to validate blocks. This is less resource-intensive, and doesn’t require specialized equipment. It is also more democratic, as it allows anyone with crypto to participate in the verification process.

How do you account for crypto transactions under IFRS?

The accounting treatment of crypto currencies under the IFRS framework has not yet been addressed comprehensively. Therefore, many uncertainties remain and the best bet is to use the principals of the conceptual framework and apply them.

Contrary to the intuitive idea of treating crypto currencies using Fair Value through Profit & Loss, most professional accountants agree that it will be appropriate to account for them in accordance with IAS 38 ‘Intangible Assets’ instead. This means that you will either record them using the cost- or the revaluation method, depending on whether or not there is an active market for the cryptocurrency.

In some cases, it may be appropriate to account for cryptocurrencies in accordance with IAS 2 ‘Inventories’.

Is the treatment as Intangible Assets suitable?

Many professional accountants criticize the current accounting treatment as poor representation of value for the crypto assets or as overly complicated. Calls to the IASB have been made repeatedly and we are expecting clarifying statements in the near future.

However, everybody knows that the accounting boards are not known for their swiftness, so we will have to work with what we have for the time being.

What are common pitfalls of tax accounting for crypto?

With an increasing awareness and experience with crypto come new challenges for accountants and tax managers. Below we address some common pitfalls:

  • Familiarity with Crypto Currencies
  • Missing Tax laws and guidelines
  • Transaction data in many different places

Familiarity with Crypto Currencies

Every day the crypto markets create new coins, projects and chains. Trends come and go and what happened two years ago appears as ancient past. DeFi, as an example, is a new trend and comes with high complexity. Crypto investors collect farming rewards, post liquidity pairs, participate in Launchpads and swap on Unicorn platforms, to name but a few.

The Metaverse represents its own challenges with its ecosystems, virtual reality and NFTs.

Each of the above transactions may change the tax accounting treatment and only who understands the details can assess their tax impact.

Capital-Bee has therefore joined forces with the globally renowned crypto tax accounting experts Ecovis to offer a solution that combines both deep crypto knowledge with tax expertise.

Missing tax laws and guidelines

The German tax authorities are clear that short-term crypto gains are taxable as other assets (refer to a detailed guide by our partner Ecovis here) and payment received for services attract personal income tax, but that is broadly where the clarity ends. We have conflicting opinions regarding staking, DeFi is not addressed in its complexity and other common crypto transactions are left out entirely.

Crypto tax payers find themselves stuck between unclear tax guidelines, the highly complex crypto space and the potentially serious consequences of getting something wrong.

Again, this is where Capital-Bee offers help. We continually review the latest tax law updates, court decisions and publications and integrate them into our automated tax solution. Furthermore, we regularly inform the public of the latest updates in our Blog. If you still have questions, reach out to the dedicated crypto tax experts of our partner Ecovis and address all your questions.

Transaction data in many different places

Most crypto investors are spreading their transactions between many different exchanges and wallets. Taking advantage of the benefits of certain ecosystems often requires exchanging tokens between different blockchains, or even between different technologies altogether, for example directed acyclic graph (DAG) networks such as Hedera.

Whoever has attempted to track all those transactions manually, knows that this task is nearly impossible. Matching “buy” and “sell” transaction data is a challenge in itself (and at what purchase price?). Furthermore, each crypto exchange only has a record of transactions on its platform. While bigger crypto exchanges provide a lot of decent quality data, some others do not let you export your own transaction data.

Therefore, investors often cannot even track the value of their crypto portfolio, let alone perform complex tax calculations.

To solve this problem Capital-Bee will automatically import your transaction data from all supported exchanges and wallets. Then, our machine learning algorithms will check your data and create a transaction list. Based on that list, we will create your completed German tax report and inform you of your estimated tax payments.