Accounting Principals

Scott J. Martin

Crypto Accounting Policies

1.  Accounting Principles
   • Going concern principle - Assumes that a business will continue to operate indefinitely, unless there is evidence to the contrary.
   • Matching principle - Records expenses related to revenue at the same time as the revenue.
   • Conservatism - Encourages accountants to be cautious and avoid overstating assets or income.
   • Materiality - Suggests that financial information should be reported if it is likely to influence users' decisions.
   • Full disclosure principle - Requires a company to disclose accounting information to potential investors or lenders.
   • Consistency - Requires a company to set economic principles to record revenue, costs, and exchanges.
   • Revenue recognition principle - Requires companies to record income or revenue when it is earned, not when it is received.
   • Accrual principle - Requires transactions to be recorded in the time period in which they occur, regardless of when cash flows are received.
   • Historical Cost
   • Periodicity
2.  IRS Treatment
   • the IRS treats cryptocurrency assets like property rather than currency
   • There are several kinds of cryptocurrency transactions that do not constitute a taxable event and, therefore, do not trigger tax liability. In general, the following types of crypto transactions are not taxed:
     • Buying crypto with cash and holding it: On its own, buying crypto with cash and holding it is not taxable because a taxable event has not occurred. Tax liability is only triggered when the crypto is sold or otherwise transferred, exchanged, or disposed of in a manner that creates a taxable event.
     • Donating crypto to a tax-exempt charity or non-profit organization: Donating crypto to a 501(c)(3) not-for-profit organization is tax deductible in most instances.
     • Receiving crypto as a gift: Crypto gifts are treated similarly to buying and holding crypto - tax liability generally does not come into play until the crypto is transferred, exchanged, or disposed of in a manner that creates a taxable event.
     • Giving crypto as a gift: Currently, with some rare exceptions, you can gift up to $16,000 worth of crypto per recipient without incurring any tax liability. While gifting crypto is often tax-free, it should be reported in most instances.
     • Transferring crypto to yourself: Businesses and active crypto investors generally have multiple wallets and/or crypto accounts. Luckily, you can transfer cryptocurrency to your other wallets and accounts without creating a taxable event
   • Tax Reportable Events
     • Receiving crypto as payment for work: If you are an employee or contractor that gets paid in crypto, you will almost certainly incur tax liability and must report all crypto payments on your taxes.
     • Receiving crypto as payment for goods or services: Companies and individuals that accept crypto payments for goods and services generally incur tax liability for those payments and must report them to the IRS.
     • Receiving crypto rewards for crypto mining: Receiving crypto mining rewards often constitutes a taxable event and triggers tax liability. Tax liability is determined by the fair market value of the rewards at the time they are earned.
     • Receiving staking rewards for crypto staking: Staking rewards are treated similarly to crypto mining rewards in that they are taxed, and tax liability is determined by the fair market value of the rewards at the time that they are earned.
     • Selling crypto for fiat currency: When crypto is sold for fiat currency, a taxable event has occurred, and any gains or losses must be reported.
     • Using crypto to pay for goods and services: As discussed earlier, the IRS treats crypto like property rather than currency for tax purposes. So if you pay for goods and/or services with crypto, the IRS treats the transaction similarly to other instances where property or assets are used as a form of payment. As a result, using crypto to pay for goods or services constitutes a taxable event, and any gains or losses must be reported. Determining fair market value of the crypto can become somewhat difficult due to the nature of this type of transaction.
     • Converting or exchanging one type of crypto for another (cryptocurrency-to-cryptocurrency exchanges): Exchanging one type of crypto for another is considered a taxable event and must be reported even if no fiat currency is involved in the transaction. In terms of tax treatment, it’s as if the first type of crypto was sold for USD, and then USD was used to purchase the second type of crypto.
     • Earning other crypto income, rewards, incentives, etc.: In addition to the taxable crypto transactions discussed above, there are also many other ways to trigger tax liability when dealing with crypto. Some common examples include earning interest from holding crypto, receiving crypto as a reward or incentive (e.g., referring a friend to a crypto company), receiving crypto via airdrop, and receiving crypto as a result of a hard fork.
   •  Are there instances where cryptocurrency-to-cryptocurrency exchanges are not taxed?
     • Crypto Gifts - As mentioned above, crypto gifts to individuals that are below a certain dollar amount in value are not subject to taxation. Neither are crypto gifts to non-profit organizations. While it may appear as if taxation has been avoided, there has yet to be a crypto-to-crypto exchange. The ownership of the crypto has been exchanged, but the crypto itself remains the same. If anything, the potential tax liability has been passed on to the individual or non-profit organization receiving the crypto as a gift. If the receiver later exchanges the gifted crypto for another type of crypto, they will have to pay taxes on any capital gains.
     • Transferring Crypto To Yourself - When crypto is moved from one account to another, it is being transferred rather than exchanged or swapped. As a result, no crypto-to-crypto exchange has occurred. While taxes are avoided, this situation does not generally involve a crypto-to-crypto exchange.
     • Capital Losses - In general, crypto-to-crypto exchanges that result in a capital loss do not require tax payments. They do, however, still need to be reported on your tax filings. These types of transactions are not immune from taxation; strictly speaking, it’s just that there is no income to tax. In certain situations, investors can still use capital losses to their benefit by employing a strategy called crypto tax-loss harvesting.
     • Like-Kind Exchanges - Like-kind exchanges are a type of “...tax-deferred transaction that allows for the disposal of an asset and the acquisition of another similar asset without generating a capital gains tax liability from the sale of the first asset.” While this definition might seem simple at first glance, there is a great deal of legal nuance and history necessary in order to determine whether an exchange of crypto assets qualifies as a like-kind exchange.