Emerging accounting needs in your HK Crypto Company. What should you do?

Sheung Wan, Hong Kong, 11th March 2022, ZEXPRWIRE, Blockchain is a method of storing information so that it is difficult or impossible to edit, hack, or trick the system.

A blockchain is essentially a digital ledger of transactions that is replicated and distributed across the blockchain’s complete network of computer systems. Each blockchain contains several transactions, and whenever a new transaction occurs on the blockchain, a record of that transaction is added to the ledger of every participant. Distributed Ledger Technology refers to a decentralized database administered by several individuals (DLT).

Blockchain supports Bitcoin and the majority of other cryptocurrencies by keeping a tamper-resistant record of transactions and keeping track of who owns what. Public blockchains are often decentralized, which means they run without a centralized authority such as a bank or government.

The term cryptocurrency refers to the cryptographic mechanisms that developers have implemented to prevent fraud. These inventions addressed a difficulty encountered by past efforts to build fully digital currencies: preventing users from producing duplicates of their holdings and attempting to spend them twice.

The accounting & tax obligation a HK based Crypto company needs to oblige

To start a crypto business, one of the most important consideration should be the volatile value of many digital assets, such as Bitcoin and other cryptocurrencies (or “tokens”), has attracted crypto miners, technology start-ups, and traditional asset managers.

Lack of direction has led to differing ideas of how the Inland Revenue Ordinance (IRO) general charging rules should be applied to various cryptocurrencies. Announcing new digital asset regulations, the Securities and Futures Commission (SFC) has issued a new DIPN 39.

As a result, many crypto accountants are concerned that crypto companies will need to examine when determining how their revenues should be taxed are not adequately articulated in DIPN 39. Simplistic interpretations of how to ascertain location and income from business operations may lead to IRD scrutiny and possible audit.

Profit Tax Filing

The taxation of gains (and losses) from digital assets will be determined by the type of digital assets and how the assets are employed in a taxpayer’s business. In this regard, the IRD divides crypto assets into three categories:

• Payment tokens, like Bitcoin, are used to pay for products and services.
• Security tokens that offer the bearer ownership interests in the business, such as a debtor, the right to a share of the company’s profits. Where digital tokens are defined as “securities” under the Securities and Futures Ordinance, the Securities and Futures Commission regulates the tokens and actions using such tokens.
• Utility tokens: The issuer of the utility tokens generally agrees to accept the tokens as payment for products and services in the future.

In the case of initial coin offerings (ICOs) involving the issuance of digital tokens in exchange for crypto or fiat currency to fund the development of a digital platform, the nature of the tokens issued will, in the first instance, determine how the tokens should be treated from a tax perspective, rather than the purpose to which token issuance proceeds are put.

If the tokens reflect a security offering like stock or ownership interests in the company, the proceeds are classified as capital and are not taxable. Unlike equity or ownership interests, utility tokens are treated as a prepayment for goods or services. The timing of revenue recognition should generally follow that of the token proceeds in the P&L. Annual corporate Profit tax returns must be filed by April 1st. The Inland Revenue Department will levy fines if the payment is not made on time.

Each company is free to select any month-end as its year-end accounting date, although the first accounting period cannot exceed 18 months from the date of incorporation. After deciding on a year-end accounting date, the company must produce its accounts every 12 months using the same accounting year-end date.

Bookkeeping

All Hong Kong firms are obliged to keep accurate business records and accounting. For example, suppose you receive cryptocurrency to buy products or services. In that case, the market value of the cryptocurrency at the time of the transaction should represent the total amount of sales and purchases. Your company must keep correct records of these transactions.

Audit

If a business is considered to be carried on, such as by trading, exchanging, or mining assets, only earnings derived in Hong Kong are liable to profits tax. Again, this is a matter of fact, and it will demand an audit of where the profit-generating operations have been carried out. Airdrops and blockchain forks will be recognized as Hong Kong-sourced revenues in a cryptocurrency business for such taxpayers.

Financial Statement Preparations

The general objective of financial statements is to convey information about a cryptocurrency’s profit and loss accounts, capital assets or trading stock, and flows. This information is necessary for management to make a financial decision.

How an accounting firm help you with crypto accounting

The majority of cryptocurrencies use blockchain technology as the foundation for transactions. Cryptocurrency typically does not require processing, or an intermediary, such as a bank, simplifies business transactions. Accounting, assurance, and tax services for crypto companies have become more complicated due to this becoming more mainstream, necessitating the use of experienced advisors who understand the nature of those complexities.

Professionals from accounting firms have extensive knowledge and experience with cryptocurrency and blockchain technology. They can offer hands-on accounting, assurance, and tax services to these types of businesses, whether they are private or public. Their skilled CPA professionals have been trained on the complexities of the business aspects such as:

On – off fiat ramping

An “on-ramp” is a service that allows users to convert fiat currency for a cryptocurrency (e.g., Bitcoin, Ethereum). Due to the widespread use of fiat, or government-issued currency, trading fiat is the most accessible way to obtain cryptocurrencies. It’s an “on-ramp” to the crypto realm.

Although many start-up crypto businesses have already established and invested in cryptocurrencies, the procedure can be confusing at first. For crypto adoption to continue, a straightforward on-ramp approach is required.

An “off-ramp” enables the conversion of cryptocurrencies for money. While on-ramps are critical for broad adoption, having an off-ramp ensures users they aren’t trapped into a cryptocurrency and may sell it for fiat at any time.

Off-ramps are thus complementary to on-ramps and help bridge the gap between traditional banking and the bitcoin market. Fiat off-ramps are also crucial in decentralized finance. Naturally, the more players in the market, the easier it is for people to buy cryptocurrencies using their bank account or debit card.

Crypto source analysis

If financial institutions continue to become increasingly involved in crypto-asset markets, this could affect their balance sheets and liquidity in unanticipated ways. As in this case, a small quantity of recognized exposure does not equate to a small amount of risk, notably if a lack of transparency and insufficient regulatory coverage exists.

Crypto accounting

Accounting software has just become available to organizations. However, not all accounting software is suitable for all business types and sizes for cryptocurrency businesses. Similarly, cryptocurrency businesses require specialist accounting software with cryptocurrency-specific functionality. Only the greatest crypto accounting software can manage all the complexities of crypto transactions.

Crypto audit

Some publications have hinted that blockchain technology might eliminate the need for a financial statement audit. If all transactions are captured in an immutable blockchain, what is left for a CPA auditor to audit? While verifying a transaction is a building block in a financial statement audit, it is just one of the essential aspects. An audit involves an assessment that recorded transactions are supported by relevant, reliable, objective, accurate, and verifiable evidence. Accepting a transaction into a dedicated blockchain may constitute sufficient appropriate audit evidence for specific financial statement assertions such as the occurrence of the transaction (e.g., that an asset recorded on the blockchain has transferred from a seller to a buyer). For example, in a bitcoin transaction for a product, the Bitcoin transfer is recorded on the blockchain. However, the auditor may or may not determine the product delivered by solely evaluating the information on the Bitcoin blockchain for a crypto company.

Third party payments from crypto to fiat

Third-party crypto-to-fiat payments are an essential step for a crypto company to upgrade its payment systems. Allowing businesses to pay employees, contractors, and others in fiat or cryptocurrency would be a welcome feature for many, particularly considering the bitcoin market’s rapid expansion.

Crypto tax advisory

Many people who invest or trade in cryptocurrencies regularly are racing to their advisor on how to structure and manage their crypto tax matters in a compliant and optimized way, even as the government works to establish a legal framework for cryptocurrencies. Given the regulatory vacuum surrounding cryptocurrencies, investors want to know the income tax consequences on their profits, ranging from 0% to 30%.

Corporate structuring for crypto

The organization of several divisions or business units within a firm is called a corporate structure. A corporate structure can vary greatly depending on a company’s goals and the industry in which it operates. Crypto Structures are the ideal corporate vehicles for keeping, trading, and receiving crypto assets while working together to achieve corporate goals and values.

Consider operating your crypto business offshore

Accounting and tax requirements in many countries can make it difficult to run a crypto business. Nevertheless, some jurisdictions are considered to be friendly to crypto, so entrepreneurs can start crypto businesses without too many obstacles.

The British Virgin Islands (BVI) is one of the most attractive options for crypto businesses due to the lack of audit requirements and the acceptance of blockchain projects. Thus, BVI company that runs crypto businesses could devote more time to figuring out the accounting and regulatory compliance while establishing BVI company registry.

Conclusion

If you looking on how to start a crypto business because no accounting standard mainly addresses the accounting for those types of assets, the accounting treatment of crypto assets and related transactions needs extensive judgment and a complete understanding of the underlying facts and circumstances. As a result, no disclosure regulations are intended, especially for digital assets and related transactions.

Media Contact

Organization : FastLane Group

Website URL: https://fastlanepro.hk/
Name: Barry Kwan
Email: [email protected]

Address: FastLane Group
Room 1405, 14/F, 135 Bonham
Strand Trade Centre
135 Bonham Strand, Sheung Wan
Hong Kong