This document provides an overview of cryptocurrencies and their tax and accounting implications. It discusses what bitcoin is, key facts about cryptocurrencies and blockchain, and how to account for and tax cryptocurrency transactions. Cryptocurrencies are treated as property for tax purposes in the US. Gains and losses from transactions are taxed similarly to capital assets. Accounting for cryptocurrencies also follows fair value accounting. The document concludes with opportunities blockchain presents for the accounting industry through automation and transparency.

1. Navigating the Tax and
Accounting Implications of
Cryptocurrencies
Dennis Murphy, CPA, CCA
Nick Ward, CBP
September 18, 2019

2. 2
Bitcoin, Cryptocurrency and
Blockchain Consulting Services

3. 3
Agenda
• What is Bitcoin?
• Bitcoin Facts
• Tax Implications
• Accounting for cryptocurrencies
• Ways to obtain cryptocurrency

4. 4
Types of Blockchain
• Public blockchain
• Private blockchain
• Consortium blockchain

5. 5
What is Bitcoin?
Bitcoin is a purely peer-to-
peer version of electronic
currency that allows online
payments to be sent directly
from one party to another
without going through a
financial institution.

6. 6
Why Bitcoin?
• Double-spending problem
• Bitcoin stores details of every transaction that
ever happened in the network in a huge
version of a ledger, called the blockchain

7. The Bitcoin Network
• The bitcoin network is decentralized and there is no central
authority or owner
• The units of value being transferred on the Bitcoin network
are bitcoins
• Bitcoin “miners” process transactions and secure the
network using specialized computer hardware through a
“proof-of-work” system

8. The Bitcoin Network

9. 9
Bitcoin Quick Facts
• Satoshi Nakamoto is the pseudonym used by the creator
• The genesis block was mined on January 3, 2009 and the
first transaction took place on January 12, 2009
• Bitcoin is divisible to eight decimal places
• Bitcoins can be purchased through exchanges

10. 10
Bitcoin Quick Facts
• Bitcoin uses cryptography to secure the network which is
why it is often referred to as a cryptocurrency
 There are over 2,100 cryptocurrencies
• Limited supply: 21 million
• Current circulation
• The value is determined by the free market
• Price fluctuations
• Market cap
• Daily transaction volume

11. 11
Bitcoin Quick Facts
Source: COINMARKETCAP.COM

12. 12
Who Accepts Bitcoin?

13. 13
Tax Implications
• Bitcoin and other virtual currencies are
declared property in the eyes of the IRS
(Notice 2014-21)
• 1099s
• Capital gains rules apply on ALL transactions
• Business transactions with bitcoin
• Lack of regulation

14. 14
Tax Implications
• USD translation will be made at the time of
transaction.
• Convert crypto amount into the reporting currency
Financial statements and tax returns
• The difference between the purchase price or
“basis” and sales price is GAIN or LOSS
Long-term is more than one year (capital gains rates
apply)
Short-term is one year or less (ordinary income)

15. 15
Tax Implications
• Consistency is King!
Cost Basis methods and estimations
Price source
FIFO typically the default
• Every cryptocurrency transaction has a “Basis
event”
Skoda Minotti receives $5,000 in BTC for services.
Skoda Minotti would record a basis in that BTC of $5,000.

16. 16
Accounting for Crypto
• Current U.S. Accounting Framework
 Cryptocurrency is not cash, currency or a financial asset
 Should be accounted for as an indefinite-lived intangible asset
– Declines in the market price are included in earnings
– Increases in value beyond the original cost or recoveries of previous
declines in value would not be captured
• What We Think
 Measure cryptocurrencies at fair value with changes in fair value recognized in
earnings
 Better reflects their economics

17. 17
Accounting Example
Journal entry for revenue ($10,244 per BTC):
BTC $5,000
Sales $5,000
Memo: BTC basis $5,000 (.48809011 BTC)
Skoda purchases a computer from Microsoft ($11,000 per BTC)
Computer $5,000
BTC $4,656 (Basis)
Gain $344
Memo: BTC Spent .45454546

18. 18
Accounting Example
Memo entry for tracking BTC after sale:
BTC Amount BTC Value BTC Basis
.48809011 BTC $5,369 $5,000
(.45454546) BTC ($5,000) ($4,656)
.03354465 BTC $369 $344

19. 19
Accounting Nightmares
Crypto Transfers
• Sending crypto from wallet to another
• Two or more wallets users control
• Transfers are not taxable, but will be lumped in with data
• No impact on BS or P&L
• Detail records are key! (Volatile pricing)

20. 20
Best Practices to save you sleep
Best Practices
• Inventory all wallets, addresses and exchanges
• Identify what various cryptocurrency you hold or transacted
in
• Download and save CSV files for every wallet or exchange
 Keep raw form and “save as” to reformat
• Screen shot balances at the end of the period

21. 21
Ways to obtain cryptocurrencies
• Purchase
 Through exchange
 Peer to peer
• Mining
 Costs
• Presale/ICOs
 Is the network live?
• Airdrops
• Forks

22. 22
Blockchain and the Accounting
Industry
• Blockchain is here
 Big Four are investing/automating audits
• Audit trail
• Tracks ownership of assets
• Smart contracts – executed automatically
• Up-to-the-minute inventory records and tracking
• Elimination of month-end close

23. 23
Blockchain and the Accounting
Industry
Other Advantages
• Reducing the potential for errors when reconciling complex and
disparate information from multiple sources
• Real-time accounting
• Freeing an auditor’s time to focus on more value-added services
• Decreasing the amount of time it takes to complete an audit,
which in turn eases the associated burden on clients
• Cash savings to clients from the reduction in audit testing
• Reducing fraudulent activities
• Increasing security against cyberattacks and hacking

24. 24
Blockchain and the Accounting
Industry
• Where Will It Start?
 Payables/receivables
 Intercompany transactions
 Contracts and agreements
• Tax Advantages
 No more time spent on hold with the IRS
 Withholdings (transparency)

25. 25
Blockchain and the Accounting
Industry

26. 26
Opportunities from Disruption
• Auditor of smart contracts
• Service auditor for a
consortium blockchain
• Administrator function
• Arbitration function

27. 27
Next Steps
• Basic understanding
• Applicability to our clients today
• Trickle-down adoption

28. 28
Questions?
If you have questions or need
additional information, please contact:
Dennis Murphy Jr., CPA, CCA
Principal
dmurphy@skodaminotti.com
440-605-7124
Nick Ward, CBP
Senior Staff Accountant
nward@skodaminotti.com
440-605-7246
www.skodaminotti.com