Accounting for Cryptocurrency Holdings within QuickBooks

Pazzy · ‎September 10, 2021

Hello,

I use QuickBooks to track my small business activity, which has included mining of Cryptocurrency in the last few years. I am running into some confusion and hoping to get some answers.

Here is the background:

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- I am located in the USA

- My business is set up as a 2 member partnership with just myself and my wife as partners (Form 1065 for tax purposes)

- Initially, I contributed cash as well as cryptocurrency to the business. I used the market value of each token at the time of transfer to my business as a capital contribution.

- In addition to the contributed coins (contributed property), I also purchased computer equipment for the business, which has been used for mining.

Accounting So far:

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- Per IRS Guidelines, I have kept track each year of the earnings from mining as self-employment income denominated in US Dollars (calculated using Bitcoin.tax). So for example, let's say that I received 0.1 ETH each month, then I ended up with a report (from Bitcoin.tax) that shows the value of that reward in USD as income.

- After receiving mining rewards mentioned above, I have accumulated ETH as an asset held by the partnership.

- I understand (believe) that each mining reward payment creates a cost basis for the accumulated ETH (e.g. the 0.1 ETH received on a specific date with Valuation of ETH = X represents a cost basis of X*0.1 in USD. This means that if I was to sell the ETH, I would need to calculate capital gains for each portion of the ETH which corresponds to the basis on the day it was received from mining).

- Lastly, earlier this year, I transferred ETH back to my personal Coinbase account in order to sell it. So, in effect, the business did not sell the ETH, but instead, it was transferred back to the partners (my wife and me). We then sold the ETH for a profit (Capital Gains).

My Questions:

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1. What is the best way to track of the accumulated Crypto coins as assets (currently I just show the income in USD, but not the actual total of each coins held (e.g. 0.1 ETH earned per month would be worth 1.2 ETH at the end of the year. How best to track this in QuickBooks)? Can I simply track the value of all my crypto in USD terms and adjust (increase or decrease manually at the end of each year based on market value)?

2. Since the ETH was transferred back to the partners, I believe this is considered to be a distribution/capital draw by the partners. But how do I account for that? Do I enter it as a sale and have the partnership recognize the capital gains? Or so I simply convert the value of the ETH to USD and then consider it a distribution to the partners? (How would this be handled if the asset being transferred was a stock or a gold nugget instead of crypto)?

Thank you!

MirriamM · ‎September 10, 2021

Thanks for reaching out to us, @Pazzy and providing detailed information about your concern.

You can create a Journal entry to track the accumulated Crypto coins as assets. But before we proceed with the steps, I highly suggest consulting your accountant or accounting professional for guidance on which account receives the debit and credit side of the transaction, as well as categorization in accounting the sale. Since every business structure is unique, they can help determine the correct recording.

To create a journal entry, here's how:

Click the Company menu at the top.
Choose Make General Journal Entries.
Fill out the fields to create your journal entry.
Pick Save and new or Save and close.

To learn more about recording journal entries in QBDT, take a look at this article: Create a journal entry in QuickBooks Desktop for Windows or Mac.

Keep me posted if you have any additional questions, as I'm always here to help. Take care.

Pazzy · ‎September 14, 2021

Hello @MirriamM,

I very much appreciate your quick response and please excuse my delay as I was trying to explore this also with the TurboTax community. I do actually know how to create Journal entries in QuickBooks. What I do not know how to do is how to use the ledger to track assets other than US Dollar and Foreign Currencies.

Let's say for the sake of example that I would like to track the value of a stock or gold. How would I do that?

I think I came up with a viable solution, even if it's not the official way to do it. What I do is simply make an adjustment at the end of the period (end of year in my case) to represent the change in value to the asset that I am holding (similar to what you would do for adjusting the value of real estate when you hold/transfer/sell it.

Here is specifically what I did:

1. Created an account that holds my Crypto Assets. Let's call one of them CryptoX

2. Each year, when I receive additional bits (distributions/earnings) of CryptoX, I record the amount of value of that asset in the account mentioned in #1 (the entry in the ledger is just income in US Dollars, but I keep track of the quantity of CryptoX in the memo field. Let say for example, that after having earned bits of CryptoX, I now hold 10 units of CryptoX in this account (I already have the total number of units earned as well as the aggregated cost basis for this asset from another tool that I use)

3. Since CryptoX changes in value based on market fluctuations, I need to adjust the value of my holding. So I created a category called Crypto Capital Gains (Losses). So now at the end of each year, I simply create a Mark-to-Market entry within my take the total value of my CryptoX holdings less my cost basis and record the difference as a gain/loss within that account..

I hope this makes sense and helps others.

JoesemM · ‎September 14, 2021

Thanks for getting back to us, @Pazzy.

That is wonderful! I appreciate you sharing the detailed steps on what you've done to track your small business activity. This information will surely help other users who are having the same issue.

Also, I'd suggest consulting your accountant to see what is the best fit for your business. This way, we can ensure that your records are safe and accurate. If you're not affiliated with one, our Intuit Find-A-ProAdvisor site can help you to find certified professionals in your area.

For future reference, you can check out these articles. It provides an overview of the basic ins and outs of accounting for cryptocurrency:

Feel free to post again here in the Community if you have any concerns with QuickBooks or any insights that you might want to share. Thanks for coming, and wishing you all the best.

arnavbathla · ‎July 28, 2022

Hi @Pazzy, great to meet. You can use a dedicated B2B Crypto accounting software such as Coinbooks

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Accounting for Cryptocurrency Holdings within QuickBooks