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Investing in crypto is a fascinating proposition owing to the lucrative return rates but most people fail to maintain a record of their investments and end up getting in trouble when it’s time to report transactions to the tax authorities.

We don’t want you to end up in trouble and that’s why we decided to put together this comprehensive tax accounting guide to help you with the ins and outs of crypto accounting. 

Note that every country taxes crypto differently owing to the region-specific tax laws, so it’s only natural that accounting strategies may vary depending on the country you live. However, basic accounting remains the same for most countries, because gains made with crypto assets are taxed as capital gains or income tax or both. So if you’re in one of these countries, this guide is for you.

Once you’re on the other end of the guide, you’ll have a decent idea about how to maintain your books without hiring a tax accountant.

So let’s get started…

Is Crypto Not a Currency?

Crypto thrives on the elementary premise that it’s a currency, however, that’s not how most people view it. Crypto is most commonly perceived as an investment avenue, one that is aggressively volatile and therefore offers a chance for investors to earn astronomical returns on their investments. The percentage of crypto transactions that actually involve the use of crypto as a currency is nominal.

Therefore, it’s only natural for regulatory bodies to class it as an asset instead of a currency, because if crypto is considered a currency from a regulatory perspective, most transactions would be tax-free.

This is the reason why crypto is treated as a capital asset in most countries (more like real estate than currency). Listed below are some of the many countries that consider crypto to be a capital asset instead of a currency for tax purposes:

• United States
• Canada
• United Kingdom
• Australia
• Germany
• Switzerland
• Japan
• South Korea
• Israel
• Singapore

Even the Scandinavian countries (Denmark, Sweden, Norway) follow suit when it comes to crypto. So while accounting for your crypto transactions, you should treat them like a capital asset instead of a currency.

How to Record Crypto Transactions in Your Books?

Before we get into this, note that we’ve chosen “$” as the preferred currency for your convenience, the numbers are to be handled in the same way regardless of where you live and what currency you use. So now that we’ve got that out of the way, let’s start.

As a crypto investor, here are the basic sections you should have in your books:

• Asset inventory: List all the cryptocurrencies you own, the quantity, and the purchase price of each.

• Sales: Record all the sales of your cryptocurrencies, including the date of the sale, the quantity sold, and the sale price.

• Purchases: Record all the purchases of cryptocurrencies, including the date of the purchase, the quantity purchased, and the purchase price.

• Fees: Keep track of all costs associated with buying, selling, or transferring cryptocurrencies. This includes transaction fees, exchange fees, and any other related fees.

• Gains and losses: Calculate your gains or losses on each sale of cryptocurrency by subtracting the cost basis from the sales price. Keep track of these gains and losses for tax purposes.

To understand how you can accommodate a simple buy/sell transaction in your books, let’s consider an example:

 Let's say you purchased 1 Bitcoin (BTC) for $10,000 on January 1st, 2023, and sold it for $12,000 on March 1st, 2023. The transaction would impact your bookkeeping records in the following way:

Asset Inventory

1. You would add 1 BTC to your asset inventory with a cost basis of $10,000.

Purchases

2. You would record the purchase of 1 BTC for $10,000 on January 1st, 2023.

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Sales

3. You would record the sale of 1 BTC for $12,000 on March 1st, 2023.

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Fees

4. Assuming that there were $50 in fees associated with the purchase and sale of the BTC, you would record these fees as follows:

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Gains and Losses

5. You would calculate the gain or loss on the sale of the BTC by subtracting the cost basis from the sales price. In this case, the gain would be $2,000. However, when you take into account the $50 transaction fee on the buy and sell transactions, you end up with a $1,900 gain.

Balancing the Books

6. At the end of the accounting period, you would balance the books to ensure that the total debits equal the total credits. In this example, the total debits would be $10,050 + $50 = $10,100, and the total credits would be $12,000. The difference between the debits and credits is $1,900, which should be recorded in the gain/loss segment of your book.

Mining Cryptocurrencies

When you mine new tokens, you are creating value for yourself and adding new tokens to the global supply. It’s the equivalent of printing new currency notes in the fiat ecosystem. Any gains incurred from mining activities are treated as income(at least in the US), while the transaction fees(gas fees) paid to mine these tokens are treated as an expense.

Let's say that you mined 0.5 BTC, which has a fair market value of $6,000, and that you earned $500 in transaction fees for the transactions included in the block.

The table below shows how the mining transaction would impact your bookkeeping records using double-entry accounting:

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In the "Mining Reward" transaction, you would record a credit of $6,000 in the Income section of your books. This amount represents the fair market value of the BTC that you mined at the time of mining, and it is considered your income. In the "Transaction Fees" section, you would record a debit of $500 to your expense account for the transaction fees that you earned.

Note that this is simply an account of how you can track all your transactions and isn’t necessarily indicative of how these transactions are taxed. The taxation of your gains or income made from these transactions depends on your location. You can access the nation-specific tax guides on our website to better understand how these transactions are taxed.

Trading Crypto Assets

Cryptocurrencies are classified as property rather than currency, which means that trading them is akin to day trading. To keep track of your transactions, you need to record the value of the cryptocurrency at the time you acquire it, and then record the sale for the value of the cryptocurrency on the date of the sale. If the sale price is higher than the purchase price, you'll record a gain, but if the sale price is lower, you'll record a loss.

When it comes to filing your taxes, you'll need to report these gains or losses on the capital gains and losses form, specifying whether they are long-term or short-term depending on the duration of time you held the cryptocurrency.

FAQs

1. Can I use LIFO (last in, first out) or FIFO (first in, first out) accounting for my crypto investments?

The use of LIFO (last in, first out) or FIFO (first in, first out) accounting methods for crypto investments may vary depending on the country and its local tax regulations. Some countries may allow either method, while others may have specific rules regarding which method to use. It is important to consult with a tax professional or accountant familiar with the local tax laws to determine which method is acceptable and how to properly report and calculate gains or losses for crypto investments. In general, FIFO is considered a conservative approach and is commonly used in many countries as the default method for determining the cost basis in securities, including crypto investments.

2. What are the good first steps to take when starting out as a crypto investor?

Here are some good first steps to take when starting as a crypto investor:

• Before investing in any cryptocurrency, it is important to do your research and understand the technology and the risks involved. There are many resources available online, such as whitepapers, forums, and news articles, that can help you learn more about cryptocurrencies.

• There are many cryptocurrency exchanges available, but not all of them are trustworthy or secure. Choose an exchange that has a good reputation, strong security measures, and supports the cryptocurrencies you are interested in.

• Diversifying your portfolio is important to minimize risk. Consider investing in different cryptocurrencies with varying levels of risk and return potential.

• Cryptocurrency prices can be volatile, so it is important to have a long-term strategy and avoid making impulsive decisions based on short-term market movements.

• Keeping accurate records of your transactions is important for tax purposes and to track your portfolio's performance over time. Use a spreadsheet or accounting software to record your transactions and keep track of your gains and losses.

• Cryptocurrency investments are subject to capital gains taxes in many countries. Be prepared to report your gains and losses accurately on your tax returns and consult with a tax professional if necessary.

3. How do I determine the fair market value of my cryptocurrencies?

The fair market value of your cryptocurrencies is determined by the price at which they could be sold in an arm's length transaction between a willing buyer and a willing seller, both of whom are knowledgeable about the asset and acting in their own best interest.

The easiest way to determine the fair market value of your cryptocurrencies is to look up the current market price on a reputable exchange or price aggregator website. However, keep in mind that the fair market value can fluctuate widely and rapidly, especially in the volatile crypto market.

If you're trading cryptocurrencies frequently, you may need to determine the fair market value of your holdings more frequently, such as on a daily or weekly basis. In such cases, you can use the average price of the cryptocurrency over a period of time as a reasonable estimate of its fair market value.

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All content on Kryptos serves general informational purposes only. It's not intended to replace any professional advice from licensed accountants, attorneys, or certified financial and tax professionals. The information is completed to the best of our knowledge and we at Kryptos do not claim either correctness or accuracy of the same. Before taking any tax position / stance, you should always consider seeking independent legal, financial, taxation or other advice from the professionals. Kryptos is not liable for any loss caused from the use of, or by placing reliance on, the information on this website. Kryptos disclaims any responsibility for the accuracy or adequacy of any positions taken by you in your tax returns. Thank you for being part of our community, and we're excited to continue guiding you on your crypto journey!