The Impact of Cryptocurrency on Accounting.

Cryptocurrency, such as Bitcoin and Ethereum, has been making waves in the finance industry for several years. This decentralized digital currency has created a new way of transacting, investing, and storing value, all outside of the traditional banking system. As cryptocurrencies continue to gain popularity, they are starting to have a significant impact on accounting practices. In this blog, we'll explore the impact of cryptocurrency on accounting and finance, including tax implications and accounting methods.

Cryptocurrency and Accounting Methods

Cryptocurrency presents unique challenges to traditional accounting methods. Unlike traditional currencies, cryptocurrencies are not backed by a central government or financial institution. They exist only in digital form, and their value is highly volatile. Therefore, the accounting treatment of cryptocurrency requires new and unique approaches.

One of the main challenges in accounting for cryptocurrency is the determination of fair value. Traditional accounting methods typically value assets based on their historical cost, but with the highly volatile nature of cryptocurrencies, fair value may be a more appropriate measure. Fair value accounting requires ongoing valuation and measurement of assets at their current market value, which can fluctuate rapidly with cryptocurrencies.

Additionally, the accounting for cryptocurrency requires a clear understanding of the differences between different types of cryptocurrencies. While Bitcoin and Ethereum may be similar in some ways, they are distinct assets with unique accounting and valuation requirements. Accountants must be familiar with the specific features of each type of cryptocurrency to accurately report and manage them.

Cryptocurrency and Tax Implications in various countries

United States:

In the US, the Internal Revenue Service (IRS) treats cryptocurrencies as property, meaning that they are subject to capital gains tax. This means that any gains or losses from the sale or exchange of cryptocurrencies are treated as capital gains or losses and must be reported on tax returns.

 

United Kingdom:

In the UK, HM Revenue and Customs (HMRC) treats cryptocurrencies as property for tax purposes, similar to the US. This means that capital gains tax may apply to gains made on the sale or exchange of cryptocurrencies. However, there are certain exemptions and relief options available for cryptocurrency transactions, such as the use of cryptocurrency as payment for goods and services.

 

Canada:

In Canada, the Canada Revenue Agency (CRA) treats cryptocurrencies as commodities, meaning that they are subject to tax on any gains made from their purchase and sale. The CRA also requires taxpayers to report any income earned through cryptocurrency mining or staking.

 

Australia:

In Australia, the Australian Taxation Office (ATO) treats cryptocurrencies as property for tax purposes, similar to the US and UK. This means that capital gains tax may apply to gains made on the sale or exchange of cryptocurrencies. However, there are certain exemptions available for personal use assets, such as using cryptocurrency to purchase goods and services.

 

Japan:

In Japan, cryptocurrency is classified as a form of income, and gains from cryptocurrency transactions are subject to income tax. However, if the cryptocurrency is held for more than one year, it is subject to a lower tax rate.

 

South Korea:

In South Korea, cryptocurrency gains are subject to income tax and capital gains tax. The tax rate varies depending on the amount of profit earned and the length of time the cryptocurrency was held.

China:

In China, the government has taken a strict stance on cryptocurrencies and banned initial coin offerings (ICOs) and cryptocurrency exchanges. Cryptocurrency trading is considered illegal, and taxpayers are not required to report gains or losses from cryptocurrency transactions on their tax returns.

 

Singapore:

In Singapore, the Inland Revenue Authority of Singapore (IRAS) treats cryptocurrencies as goods, and goods and services tax (GST) may apply to cryptocurrency transactions. Additionally, gains from cryptocurrency transactions may be subject to income tax if the taxpayer is considered to be trading in cryptocurrencies as a business.

 

India:

In India, the Reserve Bank of India (RBI) banned financial institutions from providing services to cryptocurrency businesses, effectively banning cryptocurrency trading in the country. Taxpayers are not required to report gains or losses from cryptocurrency transactions on their tax returns.

 

Hong Kong:

In Hong Kong, the government does not regulate cryptocurrencies, and they are not recognized as legal tender. Capital gains tax does not apply to cryptocurrency gains, but taxpayers may be subject to profits tax if they are considered to be trading in cryptocurrencies as a business.

Sri Lanka

The Central Bank of Sri Lanka has issued warnings regarding the use of cryptocurrencies as they are not regulated or backed by the government. Currently, there are no specific laws or regulations in Sri Lanka that govern the taxation of cryptocurrencies.

However, the Inland Revenue Department (IRD) of Sri Lanka has stated that any gains from the sale of cryptocurrencies may be subject to income tax, depending on the nature of the transaction. For instance, if a person is trading cryptocurrencies as a business, then any gains made will be subject to income tax.

Moreover, in 2019, the IRD also proposed a draft bill to tax digital transactions, which could potentially include cryptocurrency transactions. However, it is important to note that this bill has not yet been passed into law.

As the regulations regarding cryptocurrencies are still evolving in Sri Lanka, taxpayers should seek professional advice and stay up-to-date on the latest tax rules and regulations in the country.

The tax implications of cryptocurrency vary from country to country, with some countries treating it as property and others as income or commodities or not taking them as either with regard to tax calculations. It is important for taxpayers to understand the tax rules and regulations in their country and to accurately report their cryptocurrency transactions to avoid any potential legal or financial consequences.

Cryptocurrency and Auditing

The rise of cryptocurrency has also led to a need for new auditing procedures. In traditional audits, auditors rely on third-party confirmations, such as bank statements or vendor invoices, to verify the accuracy of financial transactions. However, with cryptocurrency, there is no central authority to provide these confirmations.

To audit cryptocurrency transactions, auditors must rely on blockchain technology, which is the technology that underlies cryptocurrencies. Blockchain technology provides a transparent and immutable ledger of all cryptocurrency transactions, which can be used to verify the accuracy and completeness of transactions.

In summary, cryptocurrency is having a significant impact on accounting and finance. The highly volatile nature of cryptocurrencies presents unique challenges to traditional accounting methods, and the tax implications of cryptocurrency transactions can be complex. As cryptocurrency continues to gain popularity, accountants and financial professionals must stay up-to-date with the latest developments to provide accurate and reliable accounting services to their clients.

References:

1."IRS Virtual Currency Guidance" - https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions

2."Cryptoassets: tax for individuals" - https://www.gov.uk/government/publications/cryptoassets-for-individuals/cryptoassets-for-individuals

3."CRA cryptocurrency guidance" - https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/federal-government-budgets/budget-2019-investing-middle-class/cryptocurrency-non-fungible-tokens.html

4."ATO cryptocurrency guidance" - https://www.ato.gov.au/general/gen/tax-treatment-of-crypto-currencies-in-australia---specifically-bitcoin/

5."Japan's tax code classifies cryptocurrency as property, not currency" - https://www.reuters.com/article/us-crypto-currencies-japan-tax-idUSKBN1DD03G

6."South Korea unveils new tax rules for cryptocurrencies" - https://www.reuters.com/article/southkorea-cryptocurrency-taxation-idUSL4N1O35ZV

7."China's Crypto Crackdown Intensifies as Beijing Warms Up to CBDCs" - https://www.coindesk.com/chinas-crypto-crackdown-intensifies-as-beijing-warms-up-to-cbdcs

8."IRAS e-Tax Guide: GST Treatment of Virtual Currencies" - https://www.iras.gov.sg/IRASHome/GST/GST-guide-on-e-commerce/Working-out-your-taxes/GST-treatment-of-virtual-currencies/

9."India's Cryptocurrency Regulations: A Troubled Past and an Uncertain Future" - https://www.coindesk.com/indias-cryptocurrency-regulations-a-troubled-past-and-an-uncertain-future

10."Sri Lanka Central Bank Warns Against Bitcoin and Other Cryptocurrencies" - https://news.bitcoin.com/sri-lanka-central-bank-warns-against-bitcoin-and-other-cryptocurrencies/

11."No specific laws in SL to regulate cryptocurrencies" - http://www.dailynews.lk/2021/01/28/business/240673/no-specific-laws-sl-regulate-cryptocurrencies

12."Cryptocurrency Taxes in Sri Lanka: A Beginner's Guide" - https://www.chainbits.com/guides/cryptocurrency-taxes-in-sri-lanka-a-beginners-guide/