Cryptocurrency Accounting Needs a New Method

Cryptocurrency is finally going mainstream. The news is talking about it, and more and more regular people are investing in it. On top of that, the digital asset revolution is also making its way through the corporate world and even some governments are catching the winds of it.

In Q1 of 2021 Tesla invested $1.5 trillion into Bitcoin, while technology firm Microstrategy owns over $6 billion dollars worth of Bitcoin, and this may only be the beginning,

A whole new world is opening up for investors. But with progress also come new challenges, particularly in the world of accounting. Markets always evolve before the bureaucrats and regulators catch on, and it’s no different in this case.

The quickly evolving and unpredictable cryptocurrency space does not fit clearly in the standard set by the generally accepted accounting principles (GAAP), and as time goes by it’s ever more clear that they need an update to keep up with the world of crypto.

The Current Crypto Accounting Standard

Cryptocurrencies are considered an asset like any other, so they still have to be accounted for with the standard accounting principles. The moment a company buys a digital asset it’ll have to be recognized on the balance sheet at the price on the date of purchase, be it, the fair market value. The debit has to be inserted into the asset column, and if cash was used in the investment then it has to be credited for the same amount.

Whenever the business decides it’s time to sell an asset, the opposite process happens. The asset is credited at book value and removed from the balance while you debit the cash or cash equivalent received in the trade. However due to the volatile nature of the digital asset space, it is almost impossible that the coin is bought at the same price it’s sold, due to impairment or appreciation.

The main issues

Extreme Volatility

The term cryptocurrency is somewhat confusing for most accounts. Crypto assets cannot be treated with the same standard as cash or cash equivalent, for the reason that they aren’t legal tender anywhere but El Salvador. Most governments have yet to provide detailed and clear indications on how they’ll treat cryptocurrencies, and even if they do, their stance on digital assets changes frequently,

Crypto is well known to be extremely volatile in value, while traditional FIAT currencies are not faced with this risk of fair value loss.

Accounted as an Intangible Asset

Some accountants choose the alternative method of following the inventory or financial instruments guidance. However, this also comes with its share of challenges.

Currently, under the GAAP in the US and international financial reporting standards (IFRS), cryptocurrency has to currently be reported as an intangible asset with an indefinite life.

But in both cases, it has to be accounted for on the balance sheet at their cost basis. Because of the standard cryptocurrencies become impaired any time the price goes below the cost basis, which usually happens very often.

 

Only Losses Are Recorded

According to GAAP rules, intangible assets only unrealized losses are accounted for if the asset dips below its fair value. This includes cases when the asset reverses the impairment loss and surpasses the previous price level.

For example, if you invest $500 thousand into BTC, and its fair value drops to $450 thousand soon later, under current standards you’ll have to recognize and account for the impairment loss.

And even if Bitcoin goes back up to $600 thousand the week later, you’ll still have to leave the impaired loss of $400 thousand on the balance sheet.

This is extremely unfavorable for the business investing in digital assets, but it can also lead to potentially misleading financial statements.

Crypto tax and accounting issues have opened the doors for costly tax mistakes and leaving a lot of tax savings behind. If you do not have the time or interest to

learn all the in’s and out’s of how tax law applies to your specific situation and circumstances, seek the assistance of a crypto specialized accountant like Results Tax Accountants.

New Guidelines May Be Coming Soon

It’s clear that the standards are way out of date and are potentially holding cryptocurrency adoption back. A lot of companies are unwilling to invest in cryptocurrencies, due to how complicated the accounting process is.

This has caused a lot of accountants, financial experts, politicians, and public figures to request the Financial Accounting Standards Board (FASB) change them.

Hopefully, the board will listen and address the growing concern, leaving more space for the industry to grow and develop.

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