Cryptocurrencies, or digital assets, are becoming incredibly popular. In today’s world, they are one of the most widely used applications of blockchain technology today. Nonetheless, the accounting rules for identifying bitcoin have not kept pace with modern needs, and reaching common ground on the precise accounting treatment of cryptocurrencies will be tricky.

Generally accepted accounting principles (GAAP) classify cryptocurrencies as intangible assets that must be accounted for at cost and subject to depreciation. This means that the value on a balance sheet can decrease with time. If the cryptocurrency is held as an investment and rapidly appreciates, this may not appropriately reflect the economic value to a company.

The case of bitcoin is an example. It was created as a digital currency that would rise in value over time as scarcity and the cost of mining or procuring new bitcoins increased. It was independent of any government. The notion of a local or foreign currency is violated by this absence of state ownership and responsibility. Nevertheless, bitcoin can be used to buy goods and services, and the accounting treatment for tracking economic gains and losses is based on the barter system. Bitcoins and other forms of digital currency are considered property for federal tax reasons.

Bitcoin is not the only cryptocurrency on the internet; hundreds of others range from Dogecoin to XRP and even Beertoken. However, because Bitcoins is one of the first, most recognized and most widely utilized form of this new digital currency, they are subject to the same tax principles that apply to real estate.

Cryptocurrency is not considered a currency for the purposes of calculating losses and gains under tax regulations. When using virtual currency to pay for goods or services, taxpayers must include the change in the fair market value of the virtual currency from the cost as taxable income.

For tax purposes, the fair market value is established as of the date of acquisition; simply, it is (virtually) exchanged for FIAT or regular currency. A taxpayer can have an unrealized gain or loss; for example, if they purchased Bitcoins at their 52-week high, they would likely have a loss.

As a result, accounting for cryptocurrency is not as easy as it may look. Accurate record-keeping and accurate tracking at the source will ensure accurate accounting and, in exchange, will ensure the net profit or loss is not overstated or understated.