October 31, 2022
Cryptocurrency has become increasingly popular over the last few years. The most common cryptocurrencies include Bitcoin, Ethereum, Tether, and BnB. Despite some recent volatility, many individuals have not only used it for investment purposes, but also as an asset. In fact, many companies such as Microsoft, Home Depot, Whole Foods, and Virgin Airlines are among the major companies that accept it as a form of payment. This has only served to increase its popularity. However, accepting it as payment has opened the door to a new challenge – how to account for cryptocurrency?
Over the past year, there have been several new pronouncements from different regulatory agencies attempting to address the problem. Most recently, the Financial Accounting Standards Board (FASB) declared that companies should account for cryptocurrency assets using the fair value method. This is far from a final regulation; however, FASB’s directive does provide clearer guidance for how to treat digital assets. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.
More businesses are accepting cryptocurrency as a form of payment for goods and services. While this opens doors for new and innovative ways of doing business, it also presents unique accounting challenges. There isn’t much guidance yet, but regulatory bodies like FASB are starting to change that.
Companies don’t have to convert cryptocurrency into cash immediately, though there can be unexpected and negative tax and accounting consequences if the value goes up or down significantly.
For tax purposes, the IRS treats cryptocurrency like property, not regular currency. That means it is subject to capital gains tax rates. Cryptocurrency assets held less than a year will be subject to short-term capital gains, or ordinary tax rates, whereas assets held longer than a year fall under long-term capital gains with potentially lower rates.
There are also state sales tax considerations. Many states lack clear guidance; of those that do, they vary between taxing cryptocurrency as cash while others don’t tax it at all yet.
Additionally, companies that use cryptocurrency to pay employees may be liable for self-employment taxes.
Up until now, companies haven’t had official guidance from U.S. Generally Accepted Accounting Principles (GAAP) on how to account for assets like Bitcoin or Ethereum. Most cryptocurrencies have been treated similarly to trademarks as indefinite-lived intangible assets since they have indefinite useful life. The only exceptions have been central bank digital currencies (CBDCs) and many stablecoins; broker-dealers and investment companies follow different rules as well.
Under the current accounting guidance, measuring cryptocurrency assets according to intangible results in valuing the asset at cost when it’s purchased. Impairment is tested annually or more frequently if events or circumstances change. If a cryptocurrency asset is impaired, impairment cannot be reversed even if it later increases in value.
Consideration was given to the lack of transparency this creates for financial statement users when a cryptocurrency asset increases in value after impairment.
Of course, this lack of accounting guidance hasn’t meant that there’s been a lack of reporting requirements. Since 2014, the IRS has treated cryptocurrency as property. Starting in 2020, taxpayers have been required to self-report cryptocurrency holdings on their annual tax returns.
New FASB Guidance
For years, the role of federal oversight in cryptocurrency has been mostly speculative. With the surge in demand for and growing acceptance of cryptocurrency, regulatory bodies like the SEC, FASB, and the IRS have been paying closer attention to how cryptocurrency assets are reported, accounted for, and taxed.
For its part, FASB launched a project in late 2021 to explore changing accounting requirements for cryptocurrency. At its October 12, 2022 board meeting, FASB rolled out the following new requirements:
On cost, FASB explained that:
“… specifying whether those costs are part of the initial measurement of a crypto asset affects presentation. That is, if costs are expensed as incurred, then holding gains and losses in the period of acquisition will be the result of market price changes only. If costs are capitalized, then holding gains and losses in the period of acquisition also will reflect the derecognition of those capitalized costs.”
They also considered historical cost with simplified impairment and net realizable value (NRA) as an alternative measurement basis. Fair value was the most preferred method of accounting. Companies do not need to make a special election to use this method of accounting.
FASB also looked at other cryptocurrency accounting questions, such as:
Ultimately, the board decided not to discuss the specifics of alternative measurements for inactive markets and to discuss additional guidance for implementing fair value reporting at a future meeting.
To meet the requirements for fair value measurement, crypto assets must meet the definition of an intangible asset. FASB defines intangible assets as lacking physical substance but are assets expected to benefit the entity for more than one year. Other examples of intangible assets are trademarks, patents, and copyrights. Further, indefinite-lived intangible assets “are not amortized but are tested for impairment annually, or more frequently if events or changes in circumstances indicate the asset may be impaired,” according to the SEC.
Eligible cryptocurrency assets measured at fair value also must not provide the company with enforceable rights to or claims on underlying goods, services, or other assets. They must be created or stored on a blockchain or distributed ledger, secured through cryptography, and are fungible – in other words, the asset can be traded or exchanged.
At its next board meeting, FASB plans to discuss the presentation, relevant disclosures, and transition of these new guidelines at another board meeting.
They recognized the challenges to implementing this guidance without clarification on issues like how to determine the principal market or leveling within the fair value hierarchy. The board recommended that similar guidance can be found in Topic 820. AICPA’s Practice Aid, Accounting for and Auditing Digital Assets, was also mentioned as a resource for companies to use.
There was no timetable for when additional guidance would be released.
Contact Us
Atlanta companies should note that FASB’s determination is tentative. Even though it’s not final, leaders should begin conversations about how to change the accounting method to conform with what will likely be the final accounting guidance soon. If you have questions about the information outlined above or need assistance with a tax or accounting issue, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.