Managing Your Crypto Business Transactions: A Look at Accounting Standards and Regulations 

In the field of accounting, practitioners may come across various problems that have no specific accounting standards to guide them. Cryptocurrencies are a prime example of such a challenge, as there is currently no universally recognized accounting standard for their treatment.

This means that accountants must rely on established accounting principles and guidelines to navigate the complexities of accounting for cryptocurrencies. In this article, we aim to provide a better understanding of the current state of cryptocurrency accounting, including the reasons for the lack of accounting standards in this area. We will also discuss the relevant accounting standards that accountants can utilize to address the accounting challenges posed by cryptocurrencies.

Current Challenges in Cryptocurrency Reporting: Understanding the Accounting Landscape

1. Price Fluctuations 

It is simply not possible to treat cryptocurrency like regular money or similar financial assets because they have unique characteristics that make it difficult to categorize them using traditional accounting methods. While it may seem straightforward to apply standard accounting principles to cryptocurrency, there are various challenges in doing so.

The term “cryptocurrency” is somewhat misleading because these digital assets are not recognized as legal tender in most countries, and there is a lack of consensus on how to regulate them. Unlike cash or cash equivalents, cryptocurrencies experience significant volatility in their market value, which poses a risk for financial reporting.

Therefore, it is crucial to acknowledge the differences between cryptocurrencies and traditional financial assets to ensure appropriate accounting practices are used.

2. Reporting

The inventory and financial instruments standards can offer a way to determine the value of digital assets, however, it’s important to note that both methods have their own advantages and challenges. 

According to GAAP and IFRS, publicly traded companies are required to recognize digital currencies as intangible assets with an indefinite lifespan. 

Typically, companies would record these assets at their original purchase cost on their balance sheet, without amortizing them as they are considered indefinite-lived assets. However, if the value of the asset becomes impaired, a loss must be recognized.

As cryptocurrencies are subject to high levels of volatility, their market value can often drop below their cost basis, which can lead to a loss being recognized by the company. This is known as being debased, and it is a common occurrence due to the unpredictable nature of digital assets.

3. Recording Losses

Unfortunately, the accounting guidelines in the USA only allow for the recognition of unrealized losses on digital assets, not gains. This means that if a company purchases a digital asset such as Bitcoin for $600,000 and its value drops to $400,000, the company must recognize a loss of $200,000 and reduce its holdings of Bitcoin to reflect the lower value.

Under the Generally Accepted Accounting Principles (GAAP) intangible asset accounting guidelines, it is challenging to reverse an impairment loss, even if the market value of the asset later rises above its earlier price levels. For example, if the market value of Bitcoin rises to $700,000, the company cannot reverse or increase the value of the previously recognized $200,000 loss on its balance sheet, as per GAAP, the asset remains impaired at a value of $400,000.

This approach to accounting for digital assets can be misleading to investors and potentially deceptive if not appropriately accounted for in financial reports. It may obscure the actual financial position of a company, and investors may not have a clear understanding of the true value of the company’s digital assets.

Is there a Special Accounting Principle for Crypto/Digital Assets? 

No. There is no specific set of accounting rules in the US that apply to crypto assets. However, most crypto assets are treated as intangible assets, such as bitcoin and ether, which are not subject to amortization and are considered impaired when their fair value falls below their carrying amount. This impairment cannot be reversed, even if the asset’s value recovers during the same reporting period. It’s worth noting that central bank digital currencies and certain stablecoins are not treated as intangible assets.

Keeping Up with Digital Assets: Tips for Accurate Record-Keeping in the Crypto Era

The use of cryptocurrencies in financial transactions presents various unique concerns that need to be addressed, particularly in terms of accounting principles. Just like any other asset, the acquisition of cryptocurrencies must be recorded by debiting the asset’s account on the date of purchase. And you must reverse the transaction if you wish to change your cryptocurrency back into actual currency. 

If your organization acquires cryptocurrency with fiat currency, you need to credit the equivalent amount to your cash account. Upon selling the asset, you must reverse this process by crediting the asset at its book value to eliminate it from your balance sheet and debiting cash for the received proceeds or other considerations. 

You may be able to claim a capital gain credit for the difference between the book value and the received profits if the proceeds from the sale of the asset exceed its book value by a large margin, which might be due to impairment, appreciation, or a combination of the two.

One way to simplify the accounting process for crypto business transactions is to use specialized crypto accounting software. This software can automate the process of recording transactions and tracking the asset’s value, making it easier for business firms to stay compliant with accounting standards and regulations.

Understanding Tax Implications of Crypto Business Transactions under GAAP and IFRS

A business will be required to pay income taxes on the market value of an asset in the following 4 taxable occurrences:

1. Income generated through Mining
2. Cryptocurrency Staking
3. Interest Earnings
4. Hardfork

Final Thoughts

The emergence of cryptocurrency and blockchain technology is expected to bring significant changes to the accounting industry. As this new asset class gains wider adoption, it presents unique advantages, such as enhanced security and privacy for transactions, compared to traditional fiat currency. 

Although there is still some regulatory uncertainty and price volatility, there is optimism that new regulations will provide clarity and stability to the market. Aspiring accountants should recognize the potential impact of cryptocurrency and blockchain technology and keep up-to-date with the latest developments in this rapidly evolving field. 

By doing so, they can position themselves as knowledgeable advisors to their clients in this promising area of finance that holds much potential for the future of accounting.