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Commercial Trading in Cryptocurrencies and Arbitrage Transactions in Germany: Pitfall Accounting

Commercial Trading in Crypto Currencies and Arbitrage Transactions: Pitfall Accounting

If trades are made on behalf of a company, they must be recorded individually in order to comply with the applicable accounting principles.

Trading in cryptocurrency isn’t exclusively reserved for private individuals. From a tax perspective, it can make sense to shift these activities to a corporation, especially when it comes to a large number of speculative trades within a year.

It is not only the tax rate of around 30%, as opposed to up to 45% for an individual, that makes this advantageous. Particularly in a growing market environment, the application of the Last-in-first-out (Lifo) method also allows the profit to be reduced on the balance sheet, as opposed to when applying the first-in-first-out method.

Widely accessible API interfaces make arbitrage trading possible

Because there are many easily accessible platforms for trading cryptocurrencies worldwide, and since the prices for individual coins such as Bitcoin, Ethereum and many others are not consistent, it is possible to generate profits by taking advantage of technological resources (so-called trading bots) which exploit these price differences (so-called arbitrage trading). Thanks to automation, the trading volume can quickly add up to some 2,000 to 20,000 trades per month.

If these trades are made on behalf of a company, all those trades must be recorded individually in order to comply with the applicable accounting principles. It is easy to imagine how such a large number of transactions would lead to a desire to account for them automatically. However, such automation is very complex because it goes way beyond the mere use of API interfaces.

Correct accounting is vital

It isn’t just the transactions themselves that have to be recorded, but also the conversions which have to be recorded in Euro, sometimes involving several FIAT currencies. At the same time, however, it also has to be possible to identify the amount in cryptocurrency at any given time from within the accounts. For example, a simple transaction between different platforms/wallets often requires four to five accounting entries to meet all the requirements of proper bookkeeping.

Legal and technical issues related to cryptocurrency accounting

This is where the accounting management of cryptocurrencies pushes the limits of what is technically feasible and legally possible. For example, conventional accounting software only recognizes national currencies, not cryptocurrencies. The purchased cryptocurrencies cannot simply be treated as foreign currencies within such a system but must be accounted for separately. This can be done relatively easily when buying cryptocurrencies for Euros but turns into a valuation problem when it comes to exchanging cryptocurrencies among each other, because here no Euro account is involved, which is fundamentally necessary for balancing. Even the internal transfer of cryptocurrencies from one wallet to another or from one trading platform to the next cannot be reproduced easily by the accounts department due to the lack of a corresponding transaction. On the other hand, these initially tax-neutral transactions cannot simply be ignored because the movement of each individual coin must be tracked in order to be able to apply the Lifo method appropriately.

Finally, in accounting, the principle “No transaction without a receipt” applies. Unfortunately, receipts are not issued in a blockchain transaction.

No arbitrage trading without advice

All the above issues can be overcome. However, you do need the help of experts who are familiar with the legal and actual characteristics of cryptocurrencies and who can handle the accounting of such currencies with the help of specialized, custom software. This means that even complicated transactions as well as thousands and thousands of them can be displayed in a legally compliant manner while simultaneously generating the internal documentation required for the transactions. Our firm, which specializes in cryptocurrencies, would be more than happy to help you find a suitable solution for your company and establish a secure foundation for your bookkeeping.

Continue reading:
Calculation of cryptocurrency profits: Fifo vs. Lifo
How Can German Companies Implement Cryptocurrencies as a Means of Payment?

Benjamin Kirschbaum

Attorney Benjamin Kirschbaum, based at our Berlin office, mainly works on matters relating to blockchain and cryptocurrencies. In this field, he offers our clients comprehensive advice on all aspects of tax law, financial supervision, and civil law. In addition, Benjamin Kirschbaum works on matters relating to general civil law, administrative law, canon law and the law on religions.

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