The rise of crypto assets has created a new asset class with unique characteristics that have significant accounting and tax implications. The rise and subsequent adoption of crypto assets has been rapid and exponential, with their market capitalization rising from $0 in 2009 to $200 billion in 2018. With this growth and the increase in Initial Coin Offerings (ICOs) and Offerings security token market (STO), a new asset class has been established that is unlike any other.
Crypto assets have several characteristics that distinguish them from other asset classes. They are digital in nature and exist on an immutable, distributed ledger, making them difficult to counterfeit. Furthermore, they are stored in wallets and can be transferred from one individual to another through a secure peer-to-peer network. This provides the potential for more efficient and secure accounting processes than traditional methods.
Accounting for crypto assets requires a different approach than traditional assets, as they are intangible and have no intrinsic value. Additionally, its lack of centralized regulation creates unique valuation challenges. To accurately account for crypto assets, a company must first determine the fair value of the asset. This involves taking into account the current market price, any applicable discounts or premiums, and the cost of acquisition.
Crypto assets also have significant tax implications. Depending on the jurisdiction, they can be classified as a taxable asset or as property, the latter with the potential to generate significant capital gains tax liabilities. In addition, companies must consider the tax implications of any transaction related to crypto assets, such as purchases, sales or exchanges.
Given the unique characteristics of crypto assets, there is an increasing need for companies to properly account for them. As the crypto asset market continues to grow, professional accountants must be prepared to address the unique accounting considerations associated with this new asset class.
It is important to consider whether cryptocurrencies actually meet the definition and criteria for asset recognition. Under US GAAP, items that meet the definition of an asset are recognized when their cost or value can be measured reliably. Note that the probable future economic benefits associated with the item are not a recognition requirement under US GAAP.
An item that meets the definition of an asset is recognized when it is probable that the future economic benefits associated with the item will flow to the entity . "Like" under IFRS is defined as "more likely than not", i.e. probability greater than 50%. Under US GAAP, likelihood is defined as "likely" and no percentage threshold is set. Entities need to assess whether a cryptocurrency meets these criteria and determine whether the uncertainty surrounding its future economic benefit is not volatile enough to not be an asset.
If it has been determined that the criteria for the definition and recognition of an asset have been met, the next question is one of classification. Is the asset cash or cash equivalent? The significant volatility of cryptocurrencies, coupled with the fact that they are not considered legal tender (as they are not backed by governments or widely accepted as a medium of exchange) will prevent holders from being able to "convert a known amount of cash". ” .” As such, cryptocurrencies cannot be classified as cash or cash equivalents under US GAAP or IFRS.
As defined in IFRS and US GAAP, a financial instrument would appear to be a natural classification for cryptocurrencies, allowing fair value measurement and recording changes in fair value in profit or loss. However, cryptocurrencies generally do not confer on their holders any contractual rights to receive or exchange cash or financial instruments and are therefore not financial assets. Nonetheless, certain cryptocurrency futures (contracts to buy or sell cryptocurrencies in the future) settled in cash can be considered derivatives and counted as financial instruments. Additionally, there may be circumstances where an entity holding cryptocurrency as an investment falls within the scope of “investment company status” under US GAAP, which would result in accounting for the investment, initially and thereafter, at fair value.
Cryptocurrencies are often mined or purchased with the intent to resell them, and as such, it can be argued that they meet at least part of the definition of inventory under US GAAP and IFRS. However, because cryptocurrencies are intangible, they cannot meet the US GAAP definition of inventory. Since inventories under IFRS do not need to be tangible, it can be argued that cryptocurrencies can meet this definition; however, the volume of trading may not be sufficient.
If an inventory standard is chosen to account for cryptocurrencies, the currency must be held at the lower of cost and net realizable value under IFRS and US GAAP. It is safe to say that accounting for cryptocurrencies by the aforementioned metrics in today's volatile market will not provide useful information to users of financial statements. An exception is commodity brokers who buy or sell cryptocurrency in the normal course of business. This would allow cryptocurrencies to be measured at their fair value, less costs to sell, with changes recognized in profit or loss.