In 2014 over $150,000,000 worth of Bitcoin payments were processed. This was almost exactly a $50,000,000 increase from 2013. Many businesses are accepting Bitcoin as a new payment method, not only to save a ton of money on credit card fees, but to open up to new customer segments that are spending money each day within the Bitcoin economy. It’s estimated that there are at least 50,000 businesses that are accepting Bitcoin in the United States alone. It is highly expected that this number will continue to grow, as payment processors continue to add Bitcoin as a new payment method that’s available in their prepackaged and integrated solutions. It’s important to note, however, that Bitcoin is accounted for differently in certain situations compared to traditional payment methods.
Knowing How to Spot the Accounting Difference
A significant portion of individuals and business owners alike think Bitcoin is a currency, because that is how it has been primarily used – as a form of payment in exchange for goods and services. While true, it does have characteristics of payment methods like cash, the IRS classifies Bitcoin differently, so it must be accounted for in a different way as well. The IRS classifies Bitcoin as a capital asset. This means, that whenever businesses receive Bitcoin from a purchaser they must keep track of the price they acquire it at, as well as the price they redeem/dispose/convert it to dollars at. This is because the price of Bitcoin changes each day. When it is redeemed it may be worth more or less than it was when it was received. Kind of like a stock, or real estate – also capital assets.
Correctly Accounting for the Fluctuating Price
It’s important that a business accepting Bitcoin as a payment method maintain correct accounting records so that it can correctly substantiate its acceptance in a compliant way. The main component that factors into a business’s correct accounting for Bitcoin is time held and redemption/disposal value. If a business converts its Bitcoin to cash the same day it receives it, then it can be accounted for just like a credit card payment. It is accounted for as income and the processing fee by the processor can be expensed. If a business does not convert its Bitcoin to cash the same day it receives it, however, the setting for which it is accounted for begins to change. As noted earlier, Bitcoin is classified as a capital asset for accounting purposes. So if a business holds it for more than one day and then redeems it, the business must determine whether or not it was worth more or less than its value when it was received. If the Bitcoin was held for more than one day but less than a year, and was worth more than its value the day it was received, the business is liable for accounting for a short-term gain. If it has been more than one year and was worth more than its value on the day it was received, the business is liable for accounting for a long-term gain. To the contrary, in either time period, if it is worth less than it was received for when it is disposed of or redeemed, it can be accounted for as a loss.
Discovering the Problem
Many businesses that accept Bitcoin have held it for more than one day. Also, many businesses that accept Bitcoin have redeemed incremental amounts over time. This creates a messy accounting situation. First, businesses must utilize a cost-basis method for determining their gain or loss. This means figuring out which Bitcoin redemption correlates to a subsequent receipt of Bitcoin. The recommended cost-basis method for this scenario is FIFO, or First-In, First-Out. This means that whenever Bitcoin is redeemed or disposed of (assuming it wasn’t redeemed/disposed of on the same day it was received), the business will determine the gain or loss by comparing it against the first receipt of Bitcoin that hasn’t already been redeemed or disposed of. From here, the accounting often becomes even more complex. Most redemptions do not match up completely to a corresponding receipt. They often span a portion of one or alternatively across portions of multiple receipts. In these scenarios, a business must take each redemption, and, utilizing the FIFO method, start from the beginning and go through each redemption, being careful not to ascribe any redemption to any receipt that has already been ascribed to another redemption. Sound confusing and time-consuming?
The Solution: Libra for Business – Bitcoin Accounting in Minutes
With Libra for Business, a merchant can connect to major wallets and exchanges on-demand. For example, Libra is partnered with BitPay, the world’s largest bitcoin payment processor. This allows any BitPay user to automatically import transactions in seconds. Libra for Business supports other exchanges like Coinbase and Circle as well. Alternatively, businesses can upload a spreadsheet in our generic format with no personal data to ensure completely anonymous use. Libra for Business handles just about everything from there, including the application of the cost-basis method across all relevant receipts and disposals or redemptions. Businesses can also report on a monthly basis in several formats that are essential for keeping their accounting records accurate and compliant. What can take a business hours or even days to account for can now be reduced to minutes.