Crypto bookkeeping is a component of crypto accounting that ensures your finances are in order and compliant. Ideally, you should be able to use crypto without any issues. But how can you ensure you're on top of your crypto bookkeeping?

Acctual's crypto accounting software tracks and manages your crypto transactions, making it easier to maintain accurate books.

Table of Contents

• What Is Crypto?

• What Is Crypto Bookkeeping?

• Crypto Bookkeeping In 3 Simple Steps

• Why Is Crypto Bookkeeping Important For Your Business?

• Common Challenges Faced By Businesses While Accounting For Crypto

• Best Practices For Crypto Bookkeeping & Accounting

• Pay Your Bills In Crypto With Our Crypto Accounting Software Today － Book A Demo To Learn More

What Is Crypto?

Crypto is a digital or virtual currency designed to work as a medium of exchange. It uses cryptography to secure and verify transactions and control the creation of new units of a particular crypto. 

Crypto is guarded by cryptography—the act of obtaining information with complex codes and algorithms. 

• Digital assets are decentralized and not subject to government or financial institution control. 

• Transactions are completed from one person to another vs. from one bank to another. 

• The individual owner can track each piece of crypto using a unique set of numbers. 

While crypto is an alternative to other forms of payment, modern accounting rules and regulations have yet to accommodate crypto transactions fully. This is why it’s important to understand business accounting fundamentals and how these rules apply to crypto. 

If crypto is part of your startup business model, you need to understand:

• Its primary function

• How to record it

• How it affects your business taxes

What Is Crypto Bookkeeping?

Crypto bookkeeping is the process of tracking financial transactions involving digital assets and smart contracts. For small and medium-sized businesses (SMBs), crypto bookkeeping can be important as digital assets are becoming accepted as payment and investment.

Important Decision-Making in a Volatile Market

Proper bookkeeping ensures that SMBs know their financial status, including:

• Profits and losses

• Tax liabilities

• Cash flow

This information is crucial for making informed business decisions, especially given crypto's volatility. By keeping accurate records of all crypto transactions, SMBs can better manage their financial risks and ensure compliance with tax and regulatory requirements.

Automation and Efficiency with Crypto Bookkeeping Software

Designated crypto bookkeeping software can also help SMBs streamline their accounting processes. With the right tools and systems, businesses can:

• Automate the recording and reconciliation of crypto transactions

• Reduce the time and effort required for manual data entry. 

• Frees up time for SMBs to focus on other areas of their business, such as sales and customer service.

Crypto Invoicing and Payments for Businesses and Freelancers

Acctual is crypto accounting software for businesses and freelancers transacting in digital assets. It simplifies accounts payable and receivable, enabling easy invoicing and payments in crypto. Our flexible options allow you to pay in crypto while vendors receive fiat or receive crypto while clients pay in fiat. We also integrate with your accounting system, saving you time on month-end reconciliation. 

Key features include: 

• Multi-level approvals

• Fiat-to-crypto and crypto-to-fiat payments

• Built-in AML screening

• Crypto invoice links

• Automatic payment notifications

You can simplify your financial operations with our smooth:

• AP/AR process

• Automatic bookkeeping

• Built-in internal controls

• Compliant and vendor-friendly platform

• Flexible payment options

Book a call with our team today to learn how you can pay bills and send invoices in crypto with our crypto accounting software!

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Crypto Bookkeeping In 3 Simple Steps

1. Tracking Transactions

Tracking transactions is the first and most crucial step. This involves recording all crypto activities, such as:

• Purchases

• Sales

• Transfers

• Any other transactions associated with cryptocurrencies

Essential details include the transaction's date, amount, and value and any fees incurred. This step lays the foundation for accurate and thorough bookkeeping.

2. Calculating Gains and Losses

The next step is to calculate gains and losses. This process determines the cost basis of the digital assets at the time of purchase and the selling price at the time of the transaction. The difference between these values represents the net gain or loss incurred in that transaction. This step is fundamental in understanding the financial implications of crypto transactions and ensuring accurate financial reporting.

3. Preparing Profit & Loss Reports

The final step in crypto bookkeeping involves preparing profit and loss reports. After calculating gains and losses from various crypto transactions, reporting these figures to relevant tax authorities is essential. 

Gains from crypto transactions are subject to short-term or long-term capital gains tax rates, depending on how long the asset was held before the sale. This step ensures compliance with tax regulations and a clear overview of the financial performance related to crypto investments.

The Importance of Recording Fair Market Value

To adhere to current GAAP standards for crypto transaction reporting, record a crypto's fair market value (FMV) the moment it is bought or sold; the FMV establishes the cash basis for that transaction, providing a reference point for valuation. This information is then recorded under the crypto transactions column in the balance sheet. 

If a client pays in crypto, the payment is debited from the crypto column and credited to the asset column in the general ledger. This approach ensures accurate and compliant financial reporting regarding crypto transactions.

Security Considerations for Banks and Digital Assets

Both banks and digital assets boast high-level security measures to safeguard users' assets. Digital assets rely on blockchain technology, while banks utilize robust security software. The weakest link in both systems remains the user. 

Regardless of the currency type, users must adopt best practices for securing their assets and maintaining financial data integrity. This emphasis on security underscores the importance of user diligence in dealing with digital financial transactions.

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Why Is Crypto Bookkeeping Important For Your Business?

Adopting crypto bookkeeping can help your business by making your financial management system more efficient and transparent. It ensures tax compliance and provides critical insights into your crypto asset performance, which is essential for strategic decision-making.

Access to New Markets

One significant benefit of implementing crypto bookkeeping in your business is the access it provides to new markets. With their global reach, digital assets transcend traditional geographical and financial barriers, connecting with a broader customer base. 

Progressive businesses that stay on top of financial trends, such as digital assets, are often viewed as more innovative and trustworthy. Accepting digital assets will diversify your customer base and enhance your business’s reputation as a forward-thinking enterprise.

Competitive Advantage

Crypto bookkeeping offers a competitive advantage for your business. It simplifies managing multiple wallets and staying on top of your digital asset transactions. This not only ensures financial transparency but also saves time and resources. With accurate and up-to-date records, you can make strategic decisions based on real-time data, providing an edge in the volatile crypto market.

Improved Financial Management

Integrating crypto bookkeeping into your existing accounting brings significant improvements in financial management. One of the primary benefits is the efficiency of digital record-keeping, especially with HMRC’s Making Tax Digital (MTD) initiative. With MTD, businesses are required to maintain digital records and use software to submit VAT returns. 

Businesses can align with the digital mandate and gain the power to:

• Precisely track their income

• Expenses

• Overall financial performance

Crypto bookkeeping offers real-time data access, enabling swift and informed business decisions. It also reduces human errors, which is crucial for regulatory compliance and strategic planning.

Adaptability

Unlike rigid and inflexible traditional accounting systems, blockchain technology allows real-time tracking and recording of transactions. This creates a highly adaptable system that can adjust to your business's needs. Blockchain technology provides a significant edge by adapting to new financial structures and currencies. It also eliminates the need to redesign your entire accounting structure with each change, saving time, reducing errors, and improving efficiency.

Financial Reporting

Businesses must provide accurate and timely financial statements to investors, lenders, and regulators. Accurate bookkeeping enables SMBs to generate financial reports that show the company’s financial health and performance over time. Investors and lenders can use this information to make investment decisions, while regulators can use it to ensure compliance.

Common Challenges Faced By Businesses While Accounting For Crypto

Lack of Knowledge

Managing crypto transactions can be difficult due to a lack of knowledge about how to track and report them. The complex nature of crypto bookkeeping can overwhelm business owners who may not know where to begin, resulting in an inaccurate reporting of gains and losses.

Complexity

Crypto bookkeeping is a time-consuming process that requires meticulous attention to detail. Many businesses may not have the resources or expertise to handle complexity, especially with multiple responsibilities. This complexity can make it challenging for businesses to prioritize their needs.

Security Concerns

The security of crypto transactions is a significant concern for businesses. Without the necessary expertise or tools to keep the transactions secure, businesses risk potential financial stability and reputation threats. The security adds an extra layer of complexity to crypto bookkeeping.

Tax Regulations

Tax regulations surrounding crypto transactions are complex. Businesses may struggle to keep up with these changes and maintain accurate reporting of gains and losses, exposing to potential legal and financial risks. Knowing the tax landscape of digital assets requires a deep understanding of the regulations to avoid compliance issues.

Lack of Software

Finding the right software to meet crypto bookkeeping can pose challenges for businesses. The market offers various options, but not all software solutions suit every business's unique requirements. Businesses may struggle to find a tool that effectively streamlines their crypto bookkeeping processes.

Organizations that invest in the right tools are much better equipped to capitalize on the opportunities presented in the crypto industry.

Taxes And crypto

The tax implications of crypto can pose complexities and require careful consideration for individuals and businesses. As of 2022, the IRS treats crypto as property for tax purposes, which means that gains and losses from these assets are taxable. Cryptocurrency transactions can trigger taxable events, such as:

• Exchanging crypto for fiat currency

• Paying for goods or services with crypto

• Exchanging one type of crypto for another

Reporting Capital Gains and Losses from Crypto Transactions

When you buy, sell, or trade crypto, any gains or losses realized need to be reported for tax purposes. Gains are taxed as capital gains, while losses can be used to offset gains and reduce tax liabilities. 

For example, if a company accepts payment in crypto for services rendered, and the value of that crypto increases before it is used to pay a vendor, the company would need to report the gain as taxable income. If the value of the crypto decreases before it is used to pay a vendor, the company can claim a loss on their taxes.

Non-Taxable Events for Crypto Transactions

There are also non-taxable events related to digital assets, such as:

• Buying crypto with fiat currency

• Donating crypto to a tax-exempt organization

• Transferring crypto between wallets. 

Accurate records of all crypto transactions must be kept to ensure compliance with tax laws and regulations.

Managing Crypto Taxes

Navigating crypto tax implications can pose a challenge. Individuals and businesses can use the right tools and guidance to stay on top of their tax obligations and minimize potential liabilities. Detailed records of all transactions can also help them comply with IRS regulations.

Best Practices For Crypto Bookkeeping & Accounting

Tracking crypto Transactions

Accurate and detailed tracking of crypto transactions is fundamental to effective bookkeeping practices. Every transaction across various wallets and exchanges should be logged, including critical information such as:

• Transaction dates

• Amounts

• Sender and recipient addresses

• Unique transaction IDs

• Associated fees. 

Utilizing wallets and exchanges with rich transaction history features can significantly enhance this process.

Maintaining Proper Documentation

Proper documentation is important in supporting crypto transactions and financial reporting. Essential documents should be organized and securely stored; these are:

• Purchase and sale agreements

• Receipts

• Exchange statements

• Any other relevant paperwork 

A structured approach to documentation not only simplifies the auditing process but also maintains compliance with regulatory requirements.

Utilizing crypto Accounting Software

Crypto accounting software can greatly enhance the efficiency and accuracy of bookkeeping tasks. These specialized tools offer a range of features, including:

• Transaction tracking

• Portfolio management

• Tax reporting

• Integration with popular accounting systems

Investing in reliable crypto accounting software such as Acctual can help with:

• Streamline the process

• Enhance accuracy

• Compliance with regulatory standards

Pay Your Bills In Crypto With Our Crypto Accounting Software Today － Book A Demo To Learn More

Acctual is crypto accounting software for businesses and freelancers transacting in digital assets. It simplifies accounts payable and receivable, making it easy to pay bills and send invoices in crypto. Our flexible options let you pay in crypto while vendors receive fiat, receive crypto while clients pay in fiat, or receive fiat while clients pay in crypto. We also integrate with your accounting system, saving you time on month-end reconciliation.

Key features:

• Multi-level approvals for bills

• Fiat-to-crypto and crypto-to-fiat payments

• Built-in AML screening

• Crypto invoice links

• Automatic payment notifications

• With our smooth AP/AR process, automated bookkeeping, built-in internal controls, and flexible payment options, you can simplify your financial operations with us.

Book a call with our team today to learn how you can pay bills and send invoices in crypto with our crypto accounting software!

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