Here’s everything you need to know about it.
In recent months, large companies ranging from Tesla Inc. to MicroStrategy Inc. have exchanged billions of dollars in cash for bitcoin.
However, a number of roadblocks remain in the way of a broader pattern of large corporations keeping bitcoin, ranging from the cryptocurrency’s unpredictability to reputational risk, financial executives, and accountants.
Here the main plot:
What exactly is crypto accounting, and how does it operate?
Bitcoin and other cryptocurrencies are not expressly included in the bookkeeping rules used by US businesses.
According to recommendations released by the American Accounting trade body in 2019, companies must pay for bitcoin under rules for “intangible assets” such as intellectual property.
Companies keep track of how much bitcoin they have in their accounts when they buy it. They won’t be able to report the profit until they sell if the price rises. If the value of bitcoin falls, the company would have to write down the value of its stock as an impairment charge.
Crypto is treated differently outside of the United States, where a different set of rules governs companies.
Digital coins are kept as inventories at cost price by companies who own them for sale as part of their daily business. According to the International Financial Reporting Standards Foundation, which sets guidelines for most non-US companies, many, such as broker-traders, may keep such inventories at market value.
Other firms, such as those in the United States, treat their cryptocurrencies as intangible assets. However, if the coin’s value increases again, they can reverse any liabilities to the original cost. In certain situations, businesses that report cryptocurrency as intangible assets may use market valuation to determine their crypto holdings’ value.
According to Bitcoin Treasuries bitcointreasuries.org, most publicly-traded companies with bitcoin on their balance sheets are specialized cryptocurrency or blockchain firms.
However, Tesla became the most high-profile mainstream corporation to switch some of its funds from cash to bitcoin, betting $1.5 billion on the digital currency.
It said in a regulatory filing that bitcoin would be accounted for as “indefinite-lived intangible assets” and warned that it might face impairment charges if its price falls.
About 91,000 bitcoin are held by MicroStrategy Inc, which bitcoin supporter Michael Saylor heads. According to Reuters, the company’s holdings are worth around $4.6 billion.
A securities filing analyzes bitcoin prices on cryptocurrency exchanges every quarter, with any decline in the asset’s value after acquisition resulting in an impairment fee.
Square Inc, a payments company, has also converted substantial portions of its balance sheet to bitcoin, with CEO Jack Dorsey pledging to “double down” on the cryptocurrency.
Square says it will record any drops in retail rates below the original cost as an impairment fee, but it will not mark up the value if the price rises, as required by accounting principles.
Square goes into great detail regarding some of the protection and custody risks associated with bitcoin in its most recent regulatory filings. Losing access was classified as an operational risk, with a hack or data loss potentially jeopardizing the company’s reputation.
Volatility and impairment of bitcoin were also listed as legal, regulatory, and enforcement risks.
Cryptocurrencies are taxed as property in the United States.
When a company sells a cryptocurrency, it may be subject to capital gains tax. The sum charged is determined by the length of time they have owned the coin and the current market value.
MicroStrategy told US regulators that any profits it made from selling bitcoin might result in a tax bill and that “such tax liability could be substantial.”
Similar laws apply in other big countries.
According to the UK tax department, the form of tax charged for exchanging digital currencies or receiving cryptocurrency payments depends on who is involved in the company. It is possible that such conduct would result in capital gains tax, corporation tax, or other duties, according to the study.
Tanvi Fal Dessai
Tanvi | Narrated by: Sara
Tanvi Fal Dessai
Tanvi Fal Dessai