Cryptocurrency Bookkeeping Must-know Best Practices

Cryptocurrencies have been around for some time. Bitcoin, Litecoin, Ethereum, and other digital currencies are now being used in many business transactions and are becoming an important financial instrument. The rising popularity of cryptocurrencies is drawing attention to the businesses that use them to transact, and especially how accounting for these digital currencies can be done properly.

This article provides essential information on cryptocurrency bookkeeping, and accounting best practices with tips to help simplify the process.

What is cryptocurrency bookkeeping?

Cryptocurrency in a nutshell

Cryptocurrency is a virtual or digital currency that is encrypted for security. By means of cryptocurrency, businesses can carry out their transactions peer-to-peer without centralized control or an intermediary such as a bank. According to Investopedia, the operation of most of the currencies is based on decentralized platforms with their blockchain technology, a distributed ledger enforced by a disparate network of computers, which we’ll be explaining in more detail in this article. 

It is noteworthy, though, that cryptocurrencies are, by definition, not currency. In Canada, they are viewed as a commodity and therefore treated as an investment. Therefore, accounting for cryptocurrencies is similar to other securities, such as stocks or bonds. However, in the US and some other countries, cryptocurrencies are considered property, which means that when you acquire any crypto, you need to record it at its market value, just like when you purchase a house or building for example. The same goes for when you sell or use cryptocurrency, you need to make sure to record its value correctly. A gain is made if the value when you sell or use crypto is higher than that when you obtain it, otherwise, you suffer a loss. Such gains or losses, which result from transacting or trading cryptocurrencies are taxable, so every transaction must be kept track of and accounted for in a compliant manner.

For a better understanding of cryptocurrencies and how it works for your business, check out our review article on Bitcoin and cryptocurrency for the e-commerce industry. But first, here are some essential crypto terms that you should be aware of when working with Bitcoin and the likes:

  • Blockchain is a form of distributed ledger technology (a database that is distributed to more than one computer or node) used to support Bitcoin and other cryptocurrencies, comprising pieces of digital information held together to record transactions. 
  • Tokens is a type of digital currency that represents its own asset or utility and relies on its blockchain. Tokens can be traded or transferred between users in the blockchain.
  • Wallet is a system that tracks the ownership of virtual currencies.
  • Mining: An act of earning cryptocurrency without having to put money down on it. Miners provide a service to the blockchain network using special software to solve math problems in return for the acquisition of more cryptocurrencies. Any cryptocurrency earned through this activity should be treated as income and reported accordingly. 

As online transactions are becoming a norm, the advantages of cryptocurrencies compared to traditional payment methods are easy to see. You can easily use an online wallet to send and receive cryptocurrencies with other people who have the same wallet. In this way, cryptocurrencies are not subject to currency conversion fees or exchange rates, which fluctuate and make international transactions cumbersome and costly. However, cryptocurrencies have also posed new challenges to how businesses should do bookkeeping and accounting.

Bookkeeping for cryptocurrency businesses

As a form of digital money that is unregulated by banks or government, cryptocurrency hasn’t been essentially accounted for by existing accounting standards, although most agree that it should be classified as an intangible asset, referring to standards such as International Accounting Standard (IAS) 38 and IAS 21. Due to its anonymous nature which can be exploited for illegal activities including money laundering and tax evasion, it is only a matter of time before the government takes measures to monitor the use of cryptocurrency in business transactions.

Of course, you don’t have to pay any specific income tax or Capital Gains Tax (CGT)  on purchasing goods or services. But as long as you use cryptocurrency for business investment or income generation, the actual tax accountancy surrounding Bitcoin and other digital money will inevitably be applied. To avoid potential troubles with tax and audits, bookkeepers and accountants should grasp some of the basics of crypto accounting as follows:

  • Calculate capital gains and losses based on the adjusted cost base

The adjusted cost base is the average cost for all cryptocurrencies you have obtained, from past to present, and it must be calculated separately for each type of coin you own, in case there are several of them.

  • Check the fair market value on the day of the transaction

Because cryptocurrency can be subject to variations in value, the value of a transaction, be it a commodity trade or a payment, depends on the fair market value on the same day.

  • Make payments to vendors

Payments in cryptocurrencies with a fair market value of $600 and higher must be reported to the IRS, using form 1099-MISC.

  • Record mined cryptocurrencies

It is necessary to record the currency you mined in the income account and the costs incurred by the mining act as an expense in your books. Because, when you’re “mining” cryptocurrencies, you’re creating new value for that currency (the digital equivalent of printing money, without the inflation) and creating compensation for yourself. To record your income and expenses, use tax form Schedule C if you are not incorporated, or Form 1120 if you are incorporated. Schedule C is used when you pay self-employment taxes.

  • Trade cryptocurrencies

Cryptocurrencies are considered property as their holders can sell or transfer them separately. They do not give the holder a right to receive a fixed or determinable number of units of currency. As a result, trading cryptocurrencies is just like day trading. You need to record two things: first, the value of any currency on the day you acquire it, and second, its value on the day it is sold.

The difference in value recorded will reflect your gains or losses. When you do your tax return, record these gains and losses on the required form and categorize them as short or long-term gains or losses based on how long you have the currency.

  • Account for more than one cryptocurrency

Accounting for transactions with one type of digital money is difficult enough, but in many cases, you have to handle transactions between two or more cryptocurrencies. Everything comes into play all at once, and you need to calculate multiple cost bases, adjusted cost bases, fair market values, gains, and losses. It will definitely take a great deal of time and bookkeeping skills to ensure nothing is overlooked and to maintain accurate accounting. But if you keep track every step of the way, it is definitely manageable.

cryptocurrency bookkeeping
Cryptocurrency bookkeeping best practices

Why is cryptocurrency bookkeeping complicated?

Business transactions that deal with cryptocurrencies between blockchain businesses, brokers, or funds often entail using an array of wallets or trading accounts, each with different purposes to serve. Because of the different cryptocurrency systems and formats, to report a crypto transaction for tax purposes, businesses must collect related data from various exchanges and account for them accurately according to regulations. 

Since the value of a transaction is determined by the fair market value on the day it is conducted, the accounting tasks of obtaining, consolidating, organizing all data for various assets at different times and varying prices can be a hassle. Not every business has the willingness and ability to take up that challenge. 

The complexity of this process, therefore, may lead to the reluctance of cryptocurrency businesses to maintain daily bookkeeping tasks, only to find out later that the accumulated workload is getting overwhelming, putting extra strains on accounting efforts for which enterprises must bear the resulting costs.

In addition to the complex and high volume of crypto exchanges, accountants and bookkeepers in cryptocurrency businesses must also deal with the constantly changing regulation of digital assets. With most financial guidelines on reporting and accounting meant only for fiat currency-based businesses and with few assisting tools, managing and tracking different digital assets and meeting compliance requirements can cause major hurdles for any crypto business seeking tax-effective bookkeeping practices. 

Working with highly volatile investments such as cryptocurrencies means that financial professionals have to do their tasks with utmost care. It is part of their duties to fulfill the tax obligations, so the least desirable thing is to fall behind the regulatory updates and make accounting mistakes that harm their companies. 

Cryptocurrency bookkeeping best practices

1. Track all transactions

While accounting guidelines regarding cryptocurrencies remain unclear, crypto businesses can still benefit from executing proper bookkeeping. Keep all proofs of invoices and payments safe and organized to be ready for any tax event or to help your business with a better picture of its financial situation. Besides this, other information that you’d better keep close include the list of exchange accounts, addresses, wallets used for each transaction, and especially the records of cryptocurrency value at the time you obtain it and when you get rid of it.

The burden of keeping up with piling documents can be worrying, but there are bookkeeping-friendly tools to assist you in recording necessary receipts like Shoeboxed. No more missing receipts and messy folders, Shoeboxed digitizes your documents into verified images which you can get access to anytime and anywhere. With its customized reporting feature, Shoeboxed can also help you to categorize all crypto transactions into operational costs, expenses, revenue, or other relevant transaction types.

Because all crypto-related costs, expenses, and transactions need to be converted into fiat currency at the end of the day, it is best practice for crypto businesses to track fiat and cryptocurrency transactions, and then create consolidated reports for both. Accurate data collection surely takes time, but it is the key point of this process that any crypto business must find a way to handle, whether by manual entry or by utilizing supporting software.

2. Integrate automation tools to reduce time and errors

The main problem with using standard accounting programs for cryptocurrencies is that they are only compatible with fiat currency. With the help of specialized software to export the crypto transactions to standard accounting software, though, the booking procedure for cryptocurrencies is becoming easier. There are now increasingly more such tools, so you have the options to take advantage of those with convenient functions such as the ability to integrate with cloud-based accounting systems. Reducing the time-consuming manual input and user errors, it is undoubtedly worth your investment to automate the crypto accounting processes.

3. Comply with rules and regulations

Understanding and adhering to the regulatory treatment of cryptocurrencies is crucial to the success of any business that transacts in crypto. However, defining exactly how to execute a crypto bookkeeping strategy is complicated because cryptocurrency is still a volatile financial instrument, the regulatory practices of which vary widely across different countries. In any scenario, it is wise for bookkeepers and accountants to get accustomed to these distinctions in order to guarantee regulatory compliance, especially if cryptocurrency is being used for international transactions.

Since crypto bookkeeping has not been standardized without an existing bookkeeping framework, crypto businesses have mostly carried out their bookkeeping on a case-by-case basis. Confusions regarding implementing such practices are inevitable, but above all, cryptocurrency is generally classified as a property with applicable property tax principles. Given that fact, it is sensible to prepare all the documents to justify transaction activities for tax purposes, ranging from invoices, proof of ownership of the addresses, to wallet balance.

To look on the bright side, many believe in the potential of the technology under crypto assets to disrupt the current bookkeeping system. Small improvements have been steadily introduced and it may pave the way for a new accounting model to emerge. With changes brought by blockchain technology being underway, accountants and bookkeepers should be aware of the possible opportunities and challenges these changes offer and keep themselves updated with cutting-edge knowledge and technology to stay competitive in the field. our staff from Shoeboxed would be glad if our product could accompany those who need help with storing and organizing receipts, so let us hear your voices on the crypto industry as well as the bookkeeping services you may wish you had.

Share with us your thoughts on bookkeeping for cryptocurrency in the comment section below!

Bookkeeping For Cannabis Industry Must-knows 4 Proven Best Practices

The US Cannabis Industry

Due to its illegal status at the federal level and as the business is growing fast with a variety of emerging sub-industries, Cannabis companies are facing ever more complex issues that are unique to the industry and require their operators to be extra careful when it comes to keeping their books accurate and organized. Hence, bookkeeping for Cannabis industry best practices is proven to be necessary for businesses in the field.

Let’s go through everything must-knows and best practices about bookkeeping for Cannabis industry in this article!

Banking

Not many federal-regulated financial institutions welcome those who run their business in cannabis as it is still classified as an illegal drug in many states, thus making its risky and problematic reputation. Apparently, the lack of banking options from the beginning subjects cannabis businesses to multiple issues, including internal and external theft, misallocation of funds, payroll, and insurance paid in cash.

It is not totally hopeless to find a bank that can work with your cannabis business though if you are willing to go through complicated application procedures in which regular financial statements must be handed in for reviews. The banks often do this quarterly, but monthly financial records should be ready at any time for submission since it is likely that they will be investigated to support what is reported. The banks will also pay attention to fluctuations in your report, and you don’t want your account to be shut down because you can’t account for such inconsistencies!

Cash flow control

Needless to say, it is challenging to manage cash-only businesses, and those trading in cannabis are no exception. Without a proper tracking system in place, tracking cash transactions by transaction can become a mess. In this case of cannabis – a federally controlled substance, every piece of inventory matters, so any suspected activity may cost the companies their precious licenses or even lead to criminal charges against concerned individuals.

Anti-money laundering

To prevent money laundering, marijuana companies must meet strict requirements regarding accounting and keeping records of every activity and transaction during the course of business, “from seed to sales”, and from suppliers, distributors, retailers to customers. Moreover, for any transaction or a series of transactions that total $10,000 or more in cash, cannabis businesses have to prepare Form 8300 for tax purposes, the filing of which can be confusing with errors resulting in serious fines and audits. 

Taxes

According to Internal Revenue Code Section 280E, “No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by federal law or the law of any state in which such trade or business is conducted.” In compliance with this, cannabis-related businesses follow strict limitations when reporting taxable income, with the cost of goods sold being the only deductible expense. Accounting processes, as a result, must implement complete record-keeping to ensure a compliant inventory environment.

Seed-to-sale tracking

 Cannabis business and accountants working in the industry do not often talk about seed-to-sale tracking with much enthusiasm. Every state has its own seed-to-sale system to monitor the production and distribution of Cannabis plants, causing a great deal of confusion for growers, distributors, and other stakeholders involved who need to adhere to changing rules of each local government. 

Specifically, depending on its preference, each state may require a different software system to trace and monitor the plants and finished products from inventory to the point of sale. The three popular seed-to-sale software, Biotrack, MJ Freeway, and METRC, however, tend to have unreliable reporting and it is also difficult to integrate them with existing accounting systems.

Bookkeeping for Cannabis Industry

Bookkeeping is fundamental to accounting, and with all the federal and state regulations that make accounting for cannabis extremely complex, anyone who deals with keeping the books must do it right. 

In particular, bookkeepers should know the ins and outs of Section 280E in the tax code because of its major implications on the business’s actual income and profit. Unlike those working for most small-to-medium-sized businesses, accountants and bookkeepers in Cannabis companies must get used to concepts such as cost accounting, accrual accounting, generally accepted accounting principles (GAAP), and absorption accounting. 

Since many of these principles are not required for everyday small business accounting, a generalist accountant may not be familiar with them. Finding a person with the necessary skill set to keep good records for your cannabis business, therefore, is important in several ways.

Getting ready

Whether outsourcing professional bookkeeping services or hiring an internal bookkeeper, cannabis businesses benefit greatly from having their books handled by people who have experience in the industry. It will be too late to get your accounting system set up and begin organizing your expenses months after the business starts operations. Money is spent on a daily basis, and without proper tracking of day-to-day expenditure and transactions, catch-ups of bookkeeping will turn into a nightmare with a higher tendency of errors. Even for pre-revenue companies, having a comprehensive bookkeeping system in place is essential at the beginning of their journey, when they need to know how much is spent on what before making the first profits.

Raising money

The key to keep a cash-intensive business like Cannabis companies up and running is said to lie in fundraising. Not to mention the difficulty of finding investors who understand the possible pitfalls of the industry, there are a host of components that accountants and bookkeepers can’t overlook if they would like to attract investors to their business. However, it all comes down to the basics such as providing organized books and accurate financial reports that show effective internal controls and accounting policies. There is no one who wants to entrust their money in incompetent hands, and for marijuana businesses that wish to access capital, it is expected that they can express their efficiency in financial management through good bookkeeping practices.

Taxes and deductibles

As mentioned above, under the regulation of IRC 280E, Cannabis companies cannot take deductions from business expenses such as rent, vehicle, and marketing like other companies because their business is related to a controlled substance. Despite this tax limitation, professional accountants can help to legally reduce taxable income by allocating costs to inventory and the cost of goods sold, which is mandated by IRC 471.  

Besides the reputable IRC 280E, there are other tax requirements that accurate bookkeeping can help cannabis businesses fulfill, thus maintaining their license while staying out of trouble with the IRS.

GST/HST and Provincial Sales Tax

Once a proper accounting system is set up with organized bookkeeping practices guaranteed, Cannabis companies can be at ease that they are paying the correct amount of sales tax they are supposed to. What’s more, based on the tax collected it will be easier for them to plan ahead, using the expected tax refunds for business operations. 

Excise duties

Exercise duties, applied at the time the cannabis product is delivered to a buyer, are compulsory for any cannabis licensee. Duties of each transaction must be kept track of, and the higher duty payable must also be reported. Those who own a business in the industry had better have a good grasp of what rules and regulations that the excise duty framework entails to know how to calculate duties or have a reliable accounting team to do this meticulous task for them. Plus, they should do it from early on too before all the transaction receipts pile up or go missing!

Bookkeeping for cannabis industry best practices

Knowing the rules

Whether it is for medical use or adult purchases, businesses associated with marijuana are restricted by countless written and unwritten rules, the sheer number of which may shun anyone wishing to be engaged in this space. Those who overcome the hurdles to take on the role of bookkeepers in Cannabis companies must be well aware that there is no room for ignorance here. Before things can be done “by the book”, first and foremost, bookkeepers must find out what “book” to read. Both federal and state laws have their own specifications regarding cannabis businesses, and it goes without saying that bookkeepers need to know them like the back of their hands to stay compliant. Legality, undoubtedly, is a top concern when it comes to the future growth of the cannabis industry.      

Going digital

As the foundation of good accounting and financial management, bookkeeping is all about being organized. You may have heard about digitized receipt services such as Shoeboxed that help to keep your documents safe, both online and offline, but there are more advantages of applying technology in bookkeeping than you would imagine. 

With brilliant features including verified data that is audit-ready and easily located, customized expense reports, and integrations with a variety of accounting systems, Shoeboxed offers an actionable data tool. Just like any other business, accurate records and transparent accounting procedures are what a cannabis business needs to track its finance and enhance its credibility with the bank and other financial institutions, as well as potential investors.

Shoeboxed provides digital secured quick bookkeeping solution for businesses

Software workarounds

A cannabis company is a complicated entity that involves several sub-industries (farming, chemical manufacturing, food production, and retail), and each requires all kinds of reporting pursuant to the many legislations at the state and federal levels. Another big headache for cannabis bookkeepers and accountants is the buggy seed-to-sale software requested by local regulations. Unfortunately, software that are specifically designed to assist this complicated process are still lacking and don’t work well with widely used accounting systems. 

While looking for more plausible solutions, specialists in the field suggest we make use of current software, combining their functions to serve our needs. For accounting, Quickbooks and Xero are popular choices although some attempts must be called for to create charts of accounts for each business stage. The good old Excel is also a basic tool for cost accounting, reconciliations, consolidations, and so on. If one realizes its versatility and puts decent effort into utilizing its functions, preparing monthly reports or creating accounting templates can become much easier. Finally, the unsolved issues of seed-to-sale software must be acknowledged so that predicted errors can be avoided. Making do with what we have seems to be the right strategy, at least for now.

Checks and balances

Problems with bookkeeping in cannabis businesses are mostly due to the huge amount of cash being collected, which may lead to undesirable consequences ranging from careless mistakes to fraud. There are so many things that can go wrong and result in inaccuracies found in the books when a lot of business activities occur every day. Many of them, however, can be prevented by implementing checks and balances consistently during operations. 

For example, cash counts on a daily and weekly basis can help to identify discrepancies between actual cash on hand and the records in the books. Likewise, sale receipts must be kept carefully and compared to the receipts listed regularly. It is also a good idea to have two people do the cash collection and reconciliation separately to lower the chance of a financial thief. In this way, professional bookkeepers and accountants make a perfect couple who compliments a reliable internal control system.

We have yet to know when the federal legalization of cannabis is coming and how it will change the bookkeeping practices in Cannabis companies. Whatever may happen, there is truth in keeping accurate and organized books for business smooth operations. 

What do you think about the future of the cannabis industry from now on? Do you have more tips on good bookkeeping for cannabis industry to add?

Don’t hesitate to share with us your opinions in the comment section below!