Bitcoin accounting question (US)

[kalinka]

In accrual-based accounting (US) Ok so if I recieve an amount of bitcoins from a purchase, I would record that transaction and put the equivalent amount in USD. Would it be inappropriate to re-evaluate the value of my bitcoin account before each transaction involving me spending bitcoins? (I found another post which states to re-evaluate the value of the bitcoins at the end of the tax period as an investment gain or loss, however, it would be a great bother to determine the value of inventory purchased using FIFO or similar methods to determine the value I bought the bitcoins for based on the fact that it's basically like a currency. Having up to 8 decimal places doesn't help.)

Can I simply have an "Investment gain" type of account which would rise or fall based on the adjustments of my "Bitcoin wallet" account due to change in exchange rate? Then, can I adjust my wallet with the current exchange rate before making a purchase (as well as at the end of the tax year)?

[hanwong]

I think the reason you haven't received a response to your questions is because, no one really knows. I've read differing opinions as to what bitcoins really are, are they currency, are they a product and therefore inventory. Obviously the IRS doesn't know. I think the key point is that you choose one. Decide whether you will treat them as currency or treat them as a product part of your inventory then utilize GAAP to value your currency or inventory. There are benefits and disadvantages to treating bitcoin in either manner. If a currency, you benefit from a lower capital gains rate if you are an active trader. If a product, then you can utilize COGS to reduce your top line figure. In either case you must value the bitcoin at the end of each accounting period. No way around that. It's the same way a bank has to mark to market it's book, or  grocery store has to value it's inventory of fruit. I hope this has viewpoint has been of value to you.

[kalinka]

I was doing some reading on this and, I think actually that the value of bitcoins in my wallet would be unrealized gains, and not actually taxable until actually traded for cash. Makes it a lot more complicated when using it to buy things.

[sunnankar]

I was doing some reading on this and, I think actually that the value of bitcoins in my wallet would be unrealized gains, and not actually taxable until actually traded for cash. Makes it a lot more complicated when using it to buy things.

There are actually several reasonable approaches you can take. For an in-depth discussion of the tax landscape you may consider getting a copy of A Lawyer's Take On Bitcoin And Taxes.