When Bitcoin came to life in 2009, few people outside of computer programmers took note. But since its shadowy beginnings, the idea of cryptocurrency has gone mainstream. Despite the collapse of one of the largest bitcoin exchanges, cryptocurrencies have drawn the interest of everyone from criminals taking advantage of its anonymity to large financial institutions looking to cut international transaction costs. Cryptocurrency opened the world’s eyes to the flaws in our current system for exchanging value and keeping track of those exchanges. The blockchain technology behind Bitcoin and other cryptocurrencies is set to forever change the accounting industry.
While Bitcoin may be the most recognizable name in cryptocurrency, it is far from the only one. There are dozens of others including Namecoin, Hashcoin, Litecoin, Ripple, and Dogecoin. Cryptocurrencies rely on the underlying technology of a blockchain. The blockchain is a record, or ledger, of every single transaction ever made. That record is shared between all users of the cryptocurrency and can only be updated by a consensus of a majority of the participants in the system. Information once entered, can never be erased.
What makes cryptocurrency so appealing?
Because payments are peer-to-peer, cryptocurrency transactions have no need for intermediaries such as banks. When you receive a payment via check and try to deposit it at your bank, the bank will often hold the funds for several days while it confirms the funds are available. International wire transfers may take even longer. Cryptocurrency transactions, on the other hand, may be instantaneous or take just a few minutes to be confirmed.
Although few small businesses use cryptocurrencies regularly today, there are a number of billion dollar businesses that accept Bitcoin as a form of payment, including Amazon, PayPal, and the Apple. No doubt part of the motivation to accept cryptocurrency is lower transaction fees, which are minimal or in some cases free.
Cryptocurrency also carries a degree of anonymity. The use of credit cards requires sharing your name, address, card number, expiration date, and CSV number. Providing a paper check also provides others with your name, address, bank, and account number. Cryptocurrency doesn’t require users to give up any secret information.
Cryptocurrency & The Accounting Industry
The rapid rise of cryptocurrency left governments around the world scrambling to provide guidance in accounting for and taxing cryptocurrency transactions. Some treat it like a foreign currency, some like the exchange of a service, and others, including the US, treat it as property.
The IRS issued their first set of guidance on how virtual currency transactions will be taxed in 2014 with the release of Notice 2014-21. In the US, cryptocurrencies are treated as property for federal tax purposes and taxpayers claim either capital gains or losses on transactions. The IRS requires the value of cryptocurrency to be reported in US dollars with the fair market value determined at the time of payment or receipt. This treatment results in some specific record keeping requirements, including maintaining trading records similar to those for stocks and bonds.
New accounting tools have been developed to support the recording, reporting and accounting for cryptocurrency. For example, LibraTax is a Saas platform designed to easily connect to bitcoin wallets, automatically import transactions, and calculate gains and losses. Other platforms such as Bitpay offer payroll services in bitcoin. With an estimated 14 million Bitcoin units in circulation and a current exchange rate of one Bitcoin at around $430 USD, that’s a collective market value of over $6 billion. That figure only includes Bitcoin, not the dozens of cryptocurrencies that have followed in Bitcoin’s wake. While Bitcoin was the first cryptocurrency to gain the public’s attention, it won’t be the last.
Blockchain boosters have compared neglecting the idea of cryptocurrency to “neglecting the idea of the Internet and the Hypertext Transfer Protocol (http) back in the early nineties.” Clearly, cryptocurrency has opened up new ways to think about everything from exchanging value to transfers of ownership. While the future of Bitcoin is far from certain, accountants need to understand blockchain technology and cryptocurrency in order to keep up with a changing industry.
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