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How should I report Bitcoin transactions in my company accounts?

How should I report Bitcoin transactions in my...

I am in the process of setting up an online shop and I'd like to try Bitcoin (see http://bitcoin.org for details) instead of the traditional credit card and PayPal approach. What would you recommend as a good way to track and report the value of any bitcoins I may hold so that I can submit accurate accounts at the year end? Is it simply the same as a foreign currency, or something else?

Some background notes:

Bitcoin has a lot of volatility within a deflationary currency model

Bitcoin transactions of fractions of a penny are common with bitcoins commonly denoted to 8dp which is unusual for standard accounting software

Thanks for any answers

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21st Aug 2012 13:16

They're just another currency - so record P&L items in your home currency on date of transaction at rate on that date (assuming that bitcoin won't be the major currency) and then take any changes to the P&L.

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21st Aug 2012 13:33

Verifiable reference for exchange rate?

Hi The Limey, thanks for responding - I was beginning to lose hope of getting an answer.

Just to be clear, I should follow this procedure as part of my daily book keeping

1) Purchase item from supplier for £1.00
2) Due to Bitcoin's huge volatility, I look up the instant spot rate based on the average between two large public exchanges (Mt Gox and Intersango) to arrive at a figure of 1 BTC = £10
3) Sell item in bitcoins for 0.15 BTC (£1.50) and make a note of the offered spot rate for the sale and how it was calculated
4) Repeat 1-3 for all items on sale during the year

When I come to submit my accounts I rely on my accountant to verify the spot rates are correct.

Is that essentially correct?

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21st Aug 2012 13:54

Hi Gary,

Not sure if you'll be able to rely on the accountant for this one (how many of them really know about Bitcoins?!). I'm assuming that step 2) would take place for each transaction? ie - the sales software calculates the bitcoin equivalent to each customer - in reality the exposure is GBP and bitcoins are just a way for you to get paid.

 

The purchase of goods from the supplier and the sale to the customer are separate transactions, which is a key thing for you to remember. But the outline of the process seems sensible.

If I've got your explanation wrong, sorry...

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21st Aug 2012 14:17

I'm sure that as Bitcoin grows in popularity more accountants will find themselves becoming acquainted with it.

Yes, step 2) would essentially occur at the moment the customer is presented with the item for sale. It would typically be a price that is fixed for a short period of time (say 15 minutes) while they engage with the site.

Once the bitcoins have been received from the customer then the sale is deemed to have been made and can be recorded as a complete transaction. Bitcoin doesn't have a concept of a chargeback so those bitcoins are cleared funds after a few minutes. The software would handle all the calculations for the spot rate.

I suppose the next thing to think about is the currency risk. How do I account for holding on to (volatile) bitcoins after the sale rather than immediately cashing out to an exchange for GBP? Do I assume that by holding the bitcoins after the sale I don't have to declare them as profit until I actually cash them out - essentially treating them as an asset?

And now I'm thinking about how to account for refunds. If the item purchased is defective and the customer comes back with a legitimate grievance, would I refund them the same number of bitcoins they paid, or do I use the GBP value of the item as the basis for calculating how many bitcoins they should get back?

I don't want the customer to be out of pocket for trading with me, but if the value of a bitcoin has changed considerably (e.g. 1 BTC = £20) what is the correct way to handle this?

I appreciate any advice here.

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21st Aug 2012 14:41

I think you'd have to treat them as a monetary asset and revalue them (but they are not cash in hand nor at bank, so would presumably have to recognised as a debtor). Therefore recognise gains/losses each period. Can I ask why you'd retain in Bitcoins though? Unless you've got any expenditure to be paid in them, you're probably better off out given the volatility.

The bit regarding the customer I think you'd have to think about and include in your terms and conditions ("all prices are in GBP, all payments in other currencies are for your convenience only and therefore any refunds, etc will be made at the rate prevailing. etc).

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21st Aug 2012 17:27

Why I'd stay long on bitcoins

I think the reasons I'd retain a bitcoin holding would be

1) a ready supply of funds to meet expenses (several elements of the overheads for running an internet shop can now be bought for bitcoins)

2) meeting refund requirements (minimal since I'd operate a quality store)

3) currency speculation (rumour has it that bitcoins could be worth a lot in times to come)

Of the above, only 3) justifies a debtor entry but I'm not sure.

I think you're right about stating the terms under which refunds are made and declaring GBP as the operating currency. Coupled with a "GBP equivalent" label next to the offered Bitcoin price on all communications should be enough to ensure a clear policy.

Thank you for taking the time to answer and discuss my questions - very helpful.

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21st Aug 2012 18:24

Interesting, hadn't realised there would actually be anything you could do with them! You will have to recognise on the balance sheet somewhere, the question would be where.

I don't believe that you would be able to recognise them as cash under UK GAAP (as they are neither at bank or in hand), but you possibly could under IFRS (where the term is cash and cash equivalents). If they can't be cash, they have to be a debtor. If material, I would have thought that a separate line within debtors would be appropriate, and you'd also require an accounting policy (assuming through a limited company of course). 

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22nd Mar 2013 12:14

Not debtors

The Limey wrote:

Interesting, hadn't realised there would actually be anything you could do with them! You will have to recognise on the balance sheet somewhere, the question would be where.

I don't believe that you would be able to recognise them as cash under UK GAAP (as they are neither at bank or in hand), but you possibly could under IFRS (where the term is cash and cash equivalents). If they can't be cash, they have to be a debtor. If material, I would have thought that a separate line within debtors would be appropriate, and you'd also require an accounting policy (assuming through a limited company of course). 

I would say they are not debtors, because there isn't a specific person who owes you money.  I would put them in short term investments.

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21st Aug 2012 20:55

A note on the supply chain

Thank you, The Limey, you've been a great help with all this. I'll be able to show this to my accountant and hopefully they'll be able to work with it.

Yes, the company will be a limited company registered in E & W.

As an aside, it appears that there are a lot of places that are starting to take bitcoins these days - some of them quite profitable and extremely innovative. Anyone interested in seeing what's going on there might want to keep track of this page: https://en.bitcoin.it/wiki/Trade

It just goes to show how early days it is when an entire economy can be summarised in a few links on a page, just like the World Wide Web back in 1993. We've come a long way since then, maybe, just maybe, Bitcoin will do the same.

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