Cryptocurrency is rapidly becoming of ubiquitous use. Latvia is no exception: deals involving most popular cryptocurrencies are gaining momentum among both natural and legal persons. A reasonable question then arises — how to properly account your cryptocurrency? Back in October of 2017, Blockvis wrote a letter to the State Revenue Service (SRS) requesting clarification regarding the following questions: what are the correct ways to account cryptocurrency, is it an intangible asset or a mean of payment and what taxes are levied on crypto transactions. The reply they got implied that the law does not regulate crypto accounting and there are no methodological materials on this topic either. The only point SRS explained, was that cryptocurrency is not an intangible asset nor is it a mean of payment and accounting for this asset should be kept as goods. Thus, such transactions are a subject to VAT and income tax.
Blockvis began to manage cryptocurrency accounting using a method based on the idea adopted from Estonian enterprises:
1. Receiving money, be it fiat or cryptocurrency, should be based on the clients account issued by the enterprise. Besides the mandatory fields (company requisites, description of services, accounting entries, etc.), invoice now includes an additional field — crypto wallet number, the name of the cryptocurrency and its acronym
2. A screenshot of the current crypto to euro rate from the most popular crypto bank is required to be attached to the account
EXAMPLE 1
Company “ABC” company invoices a client from Lithuania €1200,00 for consulting services with intent to receive payment in the “Ethereum” cryptocurrency (ETH). The invoice is issued in euro, the VAT (value-added tax) is taken into account in accordance with the current “VAT Law” (in this case VAT goes at 0% rate). Cryptocurrency has to be fixed at one of the major exchanges (for example, Kraken) at the time of invoicing. Based on the data from the screenshot, we mark the crypto to euro ratio and calculate the received cryptocurrency (for example, 1 ETH = 546.32 EUR, therefore 1200.00 / 546.32 = 2.1965148631 ETH). Moreover, one should consider the price of crypto up to the 10th decimal place, taking into account its greater volatility.
The financial statement will look as follows :
Debit 2310 — Credit611x — accrued receivable — 1200,00EUR
Upon confirming the receipt of cryptocurrency into a certain crypto wallet, we transfer the receivable to the “Cryptocurrency” account: Debit2111-Credit231X, €1200.00, 2.1965148631 ETH Ethereum (since we consider cryptocurrency a mean of payment and its exact amount on the balance in any specific moment of taxation is quite important, but the SRS has defined it as goods, we will use the method of continuous inventory accounting. According to the bookkeeping rules, crypto accounting on active accounts should be carried out in euro.
The asset on the balance sheet will look as follows
Debit 2111 — “Cryptocurrency” shows the amount of 1200.00EUR, which is equivalent to the 2.1965148631 ETH Ethereum cryptocurrency.
It is also recommended to revalue the assets on account 2111 upon receipt since it is obvious that at the moment of transfer the rate will differ.
EXAMPLE 2
A supplier from Latvia billed the “ABC” company for design services in both euro and Ethereum cryptocurrency. When exchanging cryptocurrency for services or goods and transferring it to the recipient’s crypto wallet based on the vendors’ invoice, take a screenshot of that transaction showing the amount of cryptocurrency and commission sent. Also, the company’s internal accounting has to include the cryptocurrency bill of sale. Since currently there are no methodological materials on cryptocurrency accounting, this document can be written in free form.
We have an account from the supplier with 1.287 ETH in crypto at the rate of 602.74EUR. 775.73EUR in total. The transaction fee was 0.000734 ETH
In bookkeeping, the account will look as follows
Debit 7551-Credit 531X — account receivable
Debit 5721-Credit 531X — VAT (21%)
Before paying the bill in crypto, you should reevaluate the balance. As we remember from Example 1, the company’s active account 2111 has €1200.00, which is equivalent to 2.1965148631 ETH (Ethereum cryptocurrency). According to the new exchange rate, the sum will be 602.74 * 2.1965148631 = 1323.93EUR
Based on this data, you can see that the cryptocurrency exchange rate has changed, which means that it is necessary to reevaluate the currency, firstly, because of its great volatility, secondly, because the difference in cryptocurrency rates may be the main source of income for the company. Thereby functioning as a valuation mechanism based on its median value.
In bookkeeping, the account will look as follows:
Debit 2111-Credit 8151 — actual income from crypto revaluation — 123.93EUR (1323.93–1200.00)
Debit 531Х-Credit 2111 — Payment in crypto. The amount in euros is 775.73EUR= 1.287 * 602.74
Debit 7751-Credit 2111 — Transaction fee. The amount in euros is 0.44EUR = 0.000734 * 602.74
Assets revaluation should be done every time there is a deal involving cryptocurrencies (both income and expense). If there are has been no transactions for a long time, we recommend reevaluating the balance at least once a month for a more accurate record.
Total company balance remains as follows:
Debit 2111 — “Cryptocurrency” — Ethereum — 2.1965148631–1.287–0.0000734 = 0.9094414631 ETH at the rate of 602.74EUR for the amount of 548.16 euros.
Debit 7551 — “Expenses on design services” — 775.73EUR
Debit 7751 — “Expenses on crypto transactions fees” — 0.44EUR
Credit 611X — “Net turnover” — 1200,00EUR
Credit 8151 — “Revenue from crypto revaluation” — 123.93EUR
EXAMPLE 3
The company’s founder decided to exchange 0.5 ETH and withdraw money in Fiat to a bank account. Based on the data from the screenshot, we consider the crypto to euro rate and calculate the received cryptocurrency (for example, 1 ETH = 599.58EUR, exchanging 0.5 ETH / 599.58EUR = 299.79EUR).
Crypto dropped by 16.07.2018 (€602.74) and the difference in the exchange rate is 2.87EUR (548.16–0.9094414631 * 599.58), which makes it a new posting:
Debit 8251 — Credit 2111 — Cryptocurrency revaluation charge
When exchanging cryptocurrency into Fiat, a proper act including information such as the amount of currency, current exchange rate, the amount to be exchanged into euro and the crypto revaluation charge should be compiled.
Debit 2620-Credit 2111 — Cryptocurrency transaction
Total “ABC” company balance remains as follows
Debit2111 — “Cryptocurrency” — Ethereum — 0,4094414631ETH
Debit2620 — “Bank” — 299.79EUR
Debit7551 — “Expenses on design services” — 775.73EUR
Debit7751 — “Expenses on cryptocurrency transactions fee” — 0.44EUR
Credit611X — “Net turnover” — 1200,00EUR
Credit8151 — “Revenue from the crypto revaluation” — 123.93EUR
Debit8251 — “Expense on crypto revaluation” — 2.87EUR
CONCLUSION
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by Alexander Suslenkov, MSc, Head of Finance Blockvis
