It's the latest and greatest trend. Cryptocurrency! But what exactly is it and what do you need to know regarding the accounting and tax implications of investing in it? Here are the six most important things you need to know about cryptocurrency:
1. Know the types of cryptocurrency. You may have heard of the most popular names of cryptocurrency, such as Bitcoin, but you need to understand there are very distinct uses for cryptocurrency. These include:
2. Liquidity of cryptocurrency. There are only about 200 cryptocurrencies that you can get to cash via the reputable exchanges and most of those require two trades using two different exchanges. Only about 10 cryptos have enough volume to be able to transact without moving the spot price which makes moving larger amounts sometimes expensive.
3. How much to invest or convert. From accepting payments to maintaining value, businesses often ask, “How much?” The top wealth managers say that, even for the most aggressive risk profile investor, you should be putting less than one percent of your net worth into cryptocurrency.
4. How to treat cryptocurrency for accounting. The most common practice is booking cryptocurrency as current assets, following the IRS guidance that cryptocurrency is property.
Also gains and losses must be recorded on all crypto to crypto or crypto to cash exchanges. The official guidance on the tax liability of transactions using cryptocurrency was issued by the IRS in 2014, so there will likely be more guidance in the next few years as cryptocurrency increases in popularity and usage.
5. The best way to “store” cryptocurrency. The more value clients have in cryptocurrency, the more secure their storage should be. However, this type of asset is digital, so how exactly should it be stored? The short answer is anything other than a cryptocurrency exchange.
Better options include a hardware or software cryptocurrency wallet:
There are a few merchant processors available that convert cryptocurrency transactions into cash. The most popular Bitcoin processor is called BitPay. With processors, if you haves an online store, your customers can pay with Bitcoin and you will receive cash based on that day’s Bitcoin price. This means they would not be subject to the volatility of the cryptocurrency value.
Shoutout to Matthew May (@TheTechCPA)