Tuesday, 26 September 2023

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How to handle crypto trading gains and losses on your balance sheet

How to handle crypto trading gains and losses on your balance sheet

Currently, no accounting standards are dedicated to crypto assets, so broader guidelines per the International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Practice (GAAP) are applied to cryptocurrency accounting.

Balance sheets are among the three primary financial statements that businesses need, alongside income and cash flow statements. Whereas income and cash flow statements show a business’s economic activity over a certain period, a balance sheet shows how many assets it has, and whether it has equity and any debt.

Balance sheets are also referred to as statements of financial position because they provide a complete picture of a business’s financial situation. It also includes every journal entry since the business started. For this reason, crypto transactions ought to be included, especially those that impact a business’s financial situation.

Why a balance sheet is needed

A balance sheet provides valuable insights into a business’s financial health and offers key benefits. Since balance sheets are typically prepared at the end of a specific reporting period, they allow one to compare business performance year-over-year. As such, balance sheets provide a measurable way to track the growth and progress of one’s business.

Balance sheets also allow one to calculate key financial ratios, such as the debt-to-equity ratio, which shows whether or not a business can pay off its debts with its equity. It also includes information necessary to compute other important ratios, such as current assets vs. current liabilities, showing whether a business can pay off its debts in 12 months.

Lastly, balance sheets allow one to reasonably evaluate the business. This can be helpful when looking for investors (to prove that they will enjoy profitable returns) or when looking to sell the business.

How do you treat crypto on a balance sheet?

One of the most common questions when preparing a balance sheet is, “Where does crypto go on the balance sheet?” As mentioned previously, both the IFRS and GAAP do not currently have any specific references with regard to crypto bookkeeping.

However, since cryptocurrencies qualify as assets, the core principles of accounting for assets apply when preparing a balance sheet that includes crypto transactions. Here are some helpful pointers:

When purchasing cryptocurrency with fiat money

Cryptocurrency trading activities should be recorded similarly to those of stock trading activities. If one buys…

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