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Flaws in the Crypto System
Cryptocurrencies such as Bitcoin have developed major popular support and following over the past decade. Consumers are developing their investment portfolios and trading and even private and public companies are diving into the digital system of making money. However, a lot of these processes are not fully legalized yet, and therefore have many limitations. Some of them include
Digital assets like crypto undergo daily swings in value. Since crypto is considered as a cash equivalent there is always a risk of its value appreciating or depreciating considerably.
Losses tend to be recorded more than profits in crypto, especially in America. Accounting rules don’t always allow for a reversal of an impairment loss even if a given asset recovers or surpasses prior price levels.
Such flaws are unfavorable in accounting purposes for businesses that invest in virtual currency and give misleading information for financial statement readers.
Ways a Crypto Accountancy Combats Issues
- When a business invests in cryptocurrency, recognizing the specific asset on the balance sheet at its fair market value on the date of purchase is vital. This can be done by recording a debit to the assets account.
- If cryptocurrency is being used to pay a vendor, one must record the transaction as if they are deciding to sell it.
- If a business is engaging in mining activities(a component of blockchain technology which brings new assets into circulation) then they should be visible in the businesses ledger.
- Adding investment in books by crediting a cash account and debiting newly acquired crypto asset accounts if buying a crypto asset on ledger.
Factors to Consider when Working with a Crypto Accountant
Spreadsheets are not enough- As it is well known, cryptocurrencies are never stagnant. They are constantly rising and falling, which makes spreadsheet accounting extremely tedious. There is a huge fluctuation on a regular basis, and different coins sell for different amounts, especially in different countries. Discussing about the tools available to help manage your assets properly with your accountant is important.
Cost Basis- It is imperative to monitor your purchase prices strictly. Keep your accountant updated on any and every new purchase made by you so that you don’t have to hunt for information later on. Have all your information and all records in front of you at all times.
There is tax for everything- Whether it’s a purchase you make, or forgetting to include small periods of crypto activity, everything is recorded and is taxable. You do not want to break a link in the blockchain which may cost you later. Work with your accountant and make a defined difference between your purchase and sale to ensure your records stay clean.
Vigilance- Constantly keeping track of your crypto activity at all times. As mentioned before, coins rise and fall and there is a lot of freedom with little regulation.It’s basically a full time job, which is where a bitcoin accountant in UK comes in handy.