How to treat Cryptocurrency in Startups – Crypto accountants rules

It’s becoming common for small technology companies and startups to hold or use cryptocurrencies. But many founders and even CFOs don’t fully understand the accounting best practices around crypto. 

If you’ve been living under a rock and haven’t heard of cryptocurrencies, then here’s a definition of cryptocurrency. Ethereum and Bitcoin are two most popular examples, but there are hundreds of other currencies. Crypto Coins are held in Wallets and can be exchanged for other currencies on Exchanges. Coins can also be exchanged for traditional currency (e.g. US Dollars or GBP, also referred to as Fiat currency).

Why would technology companies use cryptocurrencies?

Because the founders may have made some gains on crypto that they wish to invest in the company. Also the company may find investors that have made big gains in crypto trading – and due to crypto trading’s volatile nature these investors are typically comfortable with risk. These investors may wish to directly invest their crypto assets into the company.

4 Things for Founders to Remember about Accounting for Crypto

1. Your accounting records have a home currency – for example, you report your income in US Dollars and all your expenses and assets are in that same currency on your books. Your financial statements all have to be in one currency.
2. Anything that’s not in USD has to be given a fair value (this goes for assets, IP, and crypto holdings).
3. Any transactions in and out of your bank account have to be accounted for in your books.
4. ALL crypto transactions have to be recorded outside of your wallet – even if it’s a crypto-to-crypto transaction. The transaction should have a date, number of coins/tokens purchased/sold, what they were exchanged for, and the value in your home currency

What are the accounting rules around cryptocurrencies

There aren’t really any rules. Accounting has standards, not hard and fast rules. That means that the Accountant must use their judgement and follow principles. And since crypto is so new there’s a lack of strong guidelines. OK, I realize that crypto has been around and in common use for years now, but accounting has been around for centuries and accounting standards move slowly, very slowly.

There are emerging common practices, which may be useful. First consider: is cryptocurrency an asset? Yes, probably. Is cryptocurrency a cash-equivalent? It sounds like it should be based on the name but it’s probably not – it’s not liquid enough and is too volatile. Nor is it a non-cash financial asset, or an investment property. It’s most likely to be treated as an intangible asset. And with intangible assets, you need to apply a Fair Market Value for accounting purposes (or you can refer to the Cost if the market no longer exists).

But what does the IRS think?

Well, don’t believe what the IRS tells you. If you think you’re confused about Crypto accounting, imagine what the poor guidance and FAQ writers at the IRS are going through. And it’s likely going to continue to change. 

Here’s the main things to keep in mind:

1. Purchases or sales you make using cryptocurrency are likely to be considered the same as ‘barter’. You should record the expense using the equivalent value in USD.
2. Gains you make from holding on to crypto are probably going to be recorded as ‘other income’. Losses from holding crypto are likely to be an expense of some kind. 
3. The rules are completely different as soon as you start trading more frequently – then it looks like you’re intending to try and make money like a trader. I don’t even want to get into that.

Final word

• Go ahead, accept crypto from investors or for a few large transactions. Think twice before accepting it from customers or conducting a lot of transactions – it’ll be a headache.
• Keep really good records – outside of your wallet – of all transactions.
• Get help from an accountant, and expect to pay a crypto specialist accountant’s rates when preparing your year end.