Crypto accounting

A Comprehensive Guide to Crypto Asset Accounting

Explore the complexities of crypto asset accounting. Understand differences under IFRS & US GAAP, tax implications, fair value measurement, and more.

June 12, 2023

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Accounting for crypto assets remains a highly-debated topic among bookkeepers and investors today.

While innovation in the crypto space progresses rapidly, accounting standard setters have struggled to keep pace. Current accounting standards had not been written with crypto assets in mind, and therefore, one must look at the existing accounting standards and apply a principles-based approach.

The two prominent standard setters today are the IASB and FASB, responsible for the development and publication of International Financial Reporting Standards (IFRS) and US GAAP accounting standards, respectively. While both seek to improve the transparency of financial reporting, the accounting for crypto assets will slightly differ under IFRS and US GAAP, and should be applied according to the jurisdiction of the underlying entity.

In this guide, we’ll discuss the accounting for crypto assets, covering initial recognition, subsequent measurement, fair value measurement, tax implications, and disclosure requirements.

Note: This guide focuses on the accounting treatments when crypto assets are held under one’s own account, rather than on behalf of third parties.

Initial Recognition and Subsequent Measurement of Crypto Assets

One of the main differences between accounting for crypto assets under IFRS and US GAAP, is that IFRS allows for accounting under Intangibles or Inventory, while under US GAAP, crypto assets can only be accounted for under Intangibles.

The reasoning for arriving at a conclusion was to examine the nature of a crypto asset.

Is it cash?

Cash must be used as a medium of exchange and a monetary unit for pricing goods and services.

Also, cryptocurrencies are not legal tender and are mostly not issued or backed by any government or state. Hence they cannot be recognized as cash.

Is it a financial asset?

To be recognized as a financial asset, there must be a contractual right to receive cash or another financial asset. Again crypto assets do not meet the definition of a financial asset.

However, the exception would be for stablecoins, as explained under below conditions.

Is it a fixed asset?

No, cryptocurrency is not tangible in nature but digital.

Is it an inventory?

Inventories are not required to be in physical form, but inventory should consist of assets that are held for sale in the ordinary course of business. (IFRS - IAS2 ‘Inventories’)

Therefore if your entity holds the crypto asset for an extended period of time and for investment purposes, it would likely not meet the definition of inventory.

Is it an intangible asset?

If the crypto assets are acquired for investment purposes only, then it would fall under Intangibles.

(IFRS - IAS 38 ‘Intangible Assets’, US GAAP - ASC 350 ‘Intangibles, Goodwill and other’)

While most crypto assets would fall under either intangibles or inventory, as outlined above, many stablecoins are not accounted for as crypto intangible assets. This is because stablecoins meet the definition of a financial asset if the contractual arrangement includes a right to receive cash from the issuer. Understanding aspects such as the legal form of the stablecoin, redemption rights, and collateralization is essential for proper classification.

Different crypto asset accounting treatments under IFRS and US GAAP

Given the nature of many crypto assets, they will, for the most part, have an indefinite useful life and are not amortized. Instead, they are tested for impairment annually (or more frequently if impairment indicators exist).

Under intangibles, if the carrying amount of a crypto asset exceeds its fair value, you must recognize an impairment loss in an amount equal to that excess. Once the intangible asset is impaired, the impairment loss is not reversed even if the fair value subsequently increases.

The gains are only recorded until the time of sale when they are realized. (that’s the most controversial debate around recognizing crypto assets under intangibles)

Also, you are not allowed to combine the acquisition amounts of the same crypto assets across multiple dates to carry out an impairment test, and rather you should track the individual cost basis of each purchased crypto.

Tracking your impairment movements is important as it would show differing final results in your financial statements. Based on what we discussed above, below is a summary of the different crypto asset accounting treatments allowed under IFRS and US GAAP:

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Fair Value Measurement of Crypto Assets

Under crypto IFRS and US GAAP, the fair value is “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”. (IFRS 13, US GAAP ASC 820)

With different exchanges quoting different prices, it’s important that you maintain a consistent approach with regards to the pricing source of your crypto assets where the greatest volume is being traded. Given markets never close, the recommended practice would be to use the same time for pricing the assets.

For actively traded assets like Bitcoin and Ethereum, an active market or principal market exists, enabling Level 1 valuation. In the absence of an active market, a valuation model can be applied consistently from period to period.

Tax Considerations: Calculating Capital Gains/Losses

To make more informed investments and better manage risk, most finance managers actively track the unrealized gains/losses of their digital assets.

Calculating capital gains or losses also may be relevant where taxation on capital gains is levied. In some cases, capital losses may be used to offset your tax liabilities. Typically, only realised gains are relevant for tax reporting purposes.

Capital gains are usually calculated by taking the fair market value at the time of sale, minus the cost basis at which the crypto asset was acquired.

Thus, if your organization is domiciled in a jurisdiction where capital gains taxes are levied on crypto assets, it is important to understand how to assess your cost bases (i.e. what did it cost to acquire the asset) when calculating the profit or loss of transferring, selling, or spending a digital asset.

There are several methods to calculate cost-basis, including:

  • - First In, First Out (FIFO)
  • - Weighted average cost (WAC)
  • - Last In, First Out (LIFO)
  • - Highest in, first out (HIFO)

These are summarized in the table below:

Below, we will illustrate the impact that each of these methods have on the gains/losses. It is important to note that the explanation below is referring to cryptocurrencies that are fungible.

Consider the following example of Janet Saylor, CFO of MacroTactics, a Web3 fund:

  • - Janet bought 1 BTC in Jan 2017 for $1,000 per BTC
  • - Janet bought 2 BTC in Jan 2018 for $14,000 per BTC
  • - Janet bought 5 BTC in Jan 2019 for $3,500 per BTC
  • - Janet sells 2 BTC in Dec 2021 for $47,500 per BTC

With FIFO method, Janet would set her cost basis for the 2021’s sale as $15,000:

  • - Capital gains on 2021’s sale = ($47,500 x 2) - $15,000 = $80,000

With WAC method, Janet would set her cost basis for the 2021’s sale as $11,625:

  • - Capital gains on 2021’s sale = ($47,500 x 2) - $11,625 = $ 83,375

With LIFO method, Janet would set her cost basis for the 2021’s sale as $7,000:

  • - Capital gains on 2021’s sale = ($47,500 x 2) - $7,000 = $88,000

With HIFO method, Janet would set her cost basis for the 2021’s sale as $28,000:

  • - Capital gains on 2021’s sale = ($47,500 x 2) - $28,000 = $67,000

As seen above, HIFO often leads to lowest capital gains and hence tax liabilities. However, the FIFO methodology is the most widely accepted cost basis method. This is because it accounts for the frequent points of purchases and sale of crypto assets across accounting cycles. Discuss with your professional accountant when deciding on your preferred cost basis method.

Obtaining Clean Data for Cost Basis Calculations

When maintaining your ledger of digital assets transactions, it is essential to review the following data points across each wallet type:

Transaction fees

Not accounting for these may result in erroneous data being used in calculating the cost-basis of your team’s digital assets.

When calculating the cost-basis of your digital assets, it is essential to account for the fees incurred in the transaction. It is essential to deduct the transaction fees when determining the cost of the said digital asset. Some of these fees include:

Gas fees charged by the blockchain protocol

Fees imposed by the wallet provider (usually by centralised wallets)

For each of these activities, it is important to understand the relevant fees involved in the process and account for it. See table below.

Timestamping of transactions

It is common for Web3 teams to have transactions involving both centralised exchanges and self-custody wallets. The good news is that for both centralised exchanges and self-custody wallets, users can quickly export their transaction records (e.g. via the central exchange’s records or block explorers such as Etherscan).

However, centralised exchanges and block explorers often mark the timestamp of transactions in different timezones.

When compiling a chronological record of transactions across centralised and self-custody wallets, finance managers have to ensure the transactions are in the same timezone before compiling them into a master journal. This matters because cost basis methods such as FIFO require an accurate chronological order of transactions.

It is best to keep all transactions to be in the same time zone, be it UTC or the local timezone of the entity in which financial statements are prepared for.

Here are the default time zones for popular block explorers and centralised exchanges. (Updated as of Dec 2022)

Disclosure for Crypto Assets

As there are no explicit crypto IFRS and US GAAP standards, the presentation and disclosure of crypto assets and crypto asset transactions should follow the entity’s approach about the accounting model to apply to the crypto asset, i.e. as an intangible asset, inventory, a financial asset or otherwise.

However, such disclosures require significant judgement and a thorough understanding of the underlying facts and circumstances.

For example, below are the summarized disclosure details of Microstrategy for their Bitcoin holdings in the annual report 2021 (note (g) to consolidated financial statements);

  • - The Company determines the fair value based on quoted prices on the Coinbase exchange, the active exchange that the Company has determined is its principal market
  • - The Company performs an analysis each quarter to identify indicators for impairment

In determining if an impairment has occurred, the Company considers the lowest price of 1 Bitcoin quoted on the active exchange at any time since acquiring the specific bitcoin held by the Company.

Concluding Thoughts

We explored the disparity between the rapid innovation in the crypto space and the slower pace of accounting standard setters. As a result, existing accounting standards require a principles-based approach for crypto asset accounting. We highlighted the differing crypto asset accounting treatments under IFRS and US GAAP and emphasized the significance of adhering to the jurisdiction-specific guidelines.

If you’re a bookkeeper, investor, or financial professional, it’s important to stay updated on the evolving landscape of accounting standards, as new developments in the crypto industry continue to shape the way these assets are accounted for. By keeping abreast of regulatory changes and emerging best practices, individuals and organizations can ensure accurate and transparent financial reporting.

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