If you run a business that deals with cryptocurrencies, accounting and reconciliation can be a pain point. CoinTracker’s Accounting Center automates the cryptocurrency reconciliation task to provide businesses, funds, and protocols the information they need to generate income statements and balances sheets. This information can supplement your internal financial statement reporting framework.
Similar to cryptocurrency taxes, cryptocurrency accounting is an emerging area with no concrete guidance from regulators and lawmakers. We recommend consulting with an accountant familiar with your business to evaluate how accounting principles should apply to the specifics of your situation.
Cash Basis for Accounting
Cash basis for accounting is the most commonly used accounting method by small businesses in the US. This method of accounting is simple, flexible, and closely follows IRS guidelines.
If you run a small business or a startup that accepts cryptocurrencies as a form of payment, there are two primary situations where you will have to report income on your books under the cash basis of accounting:
- When sell your product and receive cryptocurrency
- When you subsequently convert that cryptocurrency into fiat currency (or another cryptocurrency) or pay for expenses using the cryptocurrency
How to use CoinTracker’s Accounting Center
Before using the Accounting Center, understanding how CoinTracker “transaction types” and “tags” work is quite important.
CoinTracker has six transaction types:
These are indicated by unique round grey icons. Transaction types are automatically detected based on the wallets and exchanges you have connected to the platform.
CoinTracker uses “tags” to specify transaction types detected by the software. Tags are indicated by colored rectangular chips.
For example, CoinTracker can detect that you received one bitcoin (1 BTC). CoinTracker however, will not know if that receipt was a gift or a payment you received from another party. In this case, you can assign the appropriate tag to the receipt transaction (from the transactions page) to produce the correct accounting outcome.
Here is a summary of how transaction types and tags work on CoinTracker (not all tags are relevant for accounting).
CoinTracker will continue to make more tags available in the future to help fine tune your financial reporting needs.
How to use CoinTracker to keep your books
Let’s walk through a sample company to show how you can use transaction types and tags to generate financial reports on the Accounting Center.
In this example, we will look at a software-as-a-service (SaaS) business where users can purchase subscriptions using cryptocurrency. We’ll assume the business is using the cash basis method of accounting.
* no tag necessary because CoinTracker will auto-detect when you sell a cryptocurrency into USD and/or another cryptocurrency
** no tag necessary because CoinTracker’s default assumption is that send transactions are payments to third parties
*** no tag necessary because CoinTracker will auto-detect when you transfer cryptocurrency between wallets/exchanges (in order for this to work both the sending and receiving transactions must be connected to CoinTracker)
Once all tags are properly assigned, the aggregated annual results will be reflected on the Accounting Center Dashboard under the income statement and balance sheet sections.
Modified Cash Basis
Small businesses have flexibility when it comes to the application of accounting methods for internal reporting purposes. One downside of following a pure cash basis method of accounting is that the balance sheet shows all your crypto assets at their cost basis. In some cases, this may be misleading and would not show the true financial picture of a company because the cryptocurrency assets are not shown on the balance sheet at their true current market value.
For example, continuing with our SaaS company example above, a pure cash basis balance sheet produced as of December 31, 2020 would show $4,500 crypto assets (cost basis) in hand. However, the true liquid value of these assets could be much higher (or lower) than the cost basis reported. Therefore, an accounting entry can be made at the end of the reporting period to adjust the cost basis of the crypto assets held on the balance sheet to match the fair market value (FMV).
The “Value” column of the balance sheet section shows the FMV of each asset class if you decide to mark up or down the crypto assets reported on the balance sheet. Note that this is an optional entry to make on your accounting software using the FMV information provided by CoinTracker. The CoinTracker-generated income statement does NOT report the unrealized gains and losses resulting from marking up/down the cost basis to FMV at the end of the reporting period.
As you jump into your cryptocurrency bookkeeping with CoinTracker’s Accounting Center, please share your questions and feedback with us on Twitter @CoinTracker.
Disclaimer: this post is informational only and is not intended as tax or investment advice. For tax or investment advice, please consult a professional.