With the rise of cryptocurrencies as an asset in recent years, it is important to take a look at how these assets are recorded from an accounting perspective.
Cryptos only exist in a digital, virtual form and do not have any physical form. They can be used to make payments for goods and services, although no government has so far actively encouraged their use as an alternative currency. They are also popular as a store of value and investment purpose.
Cryptocurrencies are initially ‘mined’ but could subsequently be bought, exchanged, awarded, or granted. They do clearly meet the definition of an asset.
For tax purposes mining of cryptocurrencies is usually taxed in a similar way to the production of any other service. But what about when cryptos are bought and held as an investment? Where and how are they recorded on a company’s balance sheet?
Cryptos do not meet the accounting definition of cash as they are not legal tender, having not been issued or backed by any government or state.
Cash equivalents are short-term highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Cryptos do not fall under this category either, as their value tends to vary widely from one day to the next. Moreover, there is only one party to a cryptocurrency, while investments that fall under this category involve two parties by their contractual nature.
Properties, Plant and Equipment or Investment Properties refer to physical assets, so we can eliminate cryptos immediately from this categorisation.
Inventories are assets that are held for sale in the ordinary course of business or used in the process of production for such sale. Cryptos can’t easily be put into this category unless perhaps if the holding of cryptos is purely for the regular trading of said assets.
Intangible assets are identifiable non-monetary assets without physical substance. They have three properties:
- without physical form.
This category acts as a catch-all category for all non-financial assets without physical form, and therefore is the most suitable categorization for cryptoassets, at least until a better category is invented and agreed upon within international accounting standards.
Accounting for Cryptos as Intangible Assets
Intangible assets are recognized initially at cost. Amortization is accounted for unless the intangible asset is deemed to have an infinite lifespan. Cryptocurrencies do have indefinite useful lives and would therefore not be amortized. After the initial purchase, an entity can choose to subsequently measure them at cost or at fair value. If the entity was a Bitcoin trader it would make more sense to subsequently measure its Bitcoin at fair value through profit or loss. In most other cases they’d be measured at cost less any impairment.
However the Bitcoin is accounted for, the entity would be prudent to make appropriate disclosures if its holdings were material or if it had a significant volume of Bitcoin-denominated transactions. It would also be prudent to contact the tax entity of the country of incorporation to seek clarification.
Until further clarification and guidance from governments, cryptocurrencies/cryptoassets appear to meet the definition of an intangible asset: identifiable as can be sold, exchanged or transferred individually; not cash and non-monetary asset; have no physical form.
In Europe, at least for the moment, the treatment of cryptocurrencies for regulatory and tax purposes has largely been determined by a decision of the European Court of Justice. In October 2015, ECJ stated that bitcoin represents a means of payment and its exchange should therefore be exempted from VAT. According to the ruling in the Skatteverket v Hedqvist Case C-264/14, the exchange of bitcoin falls within the exemption in Article 135(1)(e) of EU’s VAT Directive, which covers transactions concerning currency, bank notes, and coins used as legal tender.