Accounting for Cryptocurrency – A Beginner’s Guide

How you account for cryptocurrency is a question in the minds of many traders and financial investors. What would you do? Should you implement accounting standards similar to physical cash or devise a new accounting standard? How far both seem feasible depends on whether cryptocurrency is a currency, asset, or liability. Why not experiment, starting accounting for cryptocurrency from a traditional aspect and then moving to suggest a new one? This guide is all about knowing accounting for cryptocurrency.

Since rapid usage and adoption of cryptocurrency in markets mark its extraordinary evolutionary history, accountability is the key feature that makes the domain firm. This article speeds up step-by-step, explaining why accounting for cryptocurrency is necessary, what accounting software is, and how IAS influences the tactics to account.

Why the Need for Accounting for Cryptocurrency?

Cryptocurrency as a form of digital asset is increasingly widespread across the globe. With its acceptance in financial transactions, corporate operations, and investments, the need for its accounting arises. To cut the story short, glance at why cryptocurrency accounting is justified.

Accuracy in Financial Reporting: Accurate accounting is essential due to cryptocurrency’s complicated transactions and volatile valuations. It reflects the true worth of digital money. Also, the influence on financial statements is beneficial.

Compliance with Regulations: Since several government bodies rapidly pay attention to transactions via cryptocurrencies, it urges the need to account for it to match the laws and regulations.

Taxation: As you know, cryptocurrency is also not devoid of tax. Doing a proper accounting check ensures efficient tax calculation and reporting.

Investor and stakeholder transparency: clear accounting and exposure to cryptocurrency-related activities help investors and stakeholders better understand a company's engagement and associated risks.

Internal Control and Risk Management: Cryptocurrency demands accounting because it helps companies manage risks such as price volatility, security, and regulatory changes.

Audit and Assurance: Precise accounting for cryptocurrency ensures accurate financial statements and makes audits much more effortless.

Decision-making: Trustworthy cryptocurrency accounting confirms you make informed decisions about crypto investments, trading, and transactions.

What is the Accounting Issue of Cryptocurrency?

Cryptocurrency bangs in the market due to its unique characteristics. Explaining these is not mandatory for many investors entering the domain. However, dealing with cryptocurrencies raises the demand for accounting implications.

Although you can try many accounting standards, including existing ones, realizing the mark difference between digital and physical money makes it somewhat tricky. Choosing which standard is suitable for cryptocurrency accounting suggests uncovering its classification. If seen from the traditional asset classification, it raises an explanation that you must know.

Cash or Cash Equivalents

First things first, when you decide to account for cryptocurrency under the traditional asset class, you believe they are cash equivalents. However, the reality is the opposite. According to the International Accounting Standard (IAS 7), cryptocurrencies do not confirm the definition of cash and cash equivalents and are not considered an accepted exchange medium. Not only this, the crypto values fluctuate significantly, raising the need for other accounting standards.

Financial Instruments

Because cryptocurrency does not constitute a legal right to receive or deliver money, the International Financial Reporting Standard (IFRS 9) considers it does not meet the criteria for financial instruments, highlighting another accounting issue of cryptocurrency.

Inventory

The International Accounting Standard (IAS 2) does not consider cryptocurrencies as inventory. It means they are not tangible assets. Once again, this does not fulfil the benchmark of certain aspects of existing accounting standards.

Point to be Noted: Cryptocurrency is accounted for as inventory in certain situations. You must know later in the blog.

Accounting for Cryptocurrency

Since you acknowledge that cryptocurrency invalidates famous accounting standards, IAS 38 has a new idea. Now, you can account for cryptocurrency while considering it intangible. To understand why cryptocurrency is intangible, one can look at the definition, which describes intangible assets as recognizable, non-financial assets that lack physical form.

The question of why it is intangible reveals its distinct characteristics.

Identifiable: Cryptocurrency possesses a unique identity, making it different from other assets.

Separable: You can sell, transfer, rent, license, or exchange cryptocurrencies individually. This characteristic makes it separable from other assets.

Capable of Being Sold or Transferred Individually: Once again, cryptocurrencies encourage selling and transferring it individually, meeting the criteria of intangible assets.

Under IAS 38 and IAS 21, cryptocurrency accounts for intangible assets. This classification is appropriate and aligns with the nature of digital money.

Cryptocurrency as Inventory

Accounting for cryptocurrency is only possible considering it as an intangible asset. Not anymore. Now you can use inventory as cryptocurrency and account for it.

A company must follow the rules for inventories when it buys and sells cryptocurrencies as part of its regular business. (International Financial Reporting Standards 102) It is due to digital money being considered stock or assets that you can hold for sale. On the other hand, companies remember the IAS 38 rule, which prefers to hold cryptocurrencies as intangible assets.

The value of inventory is calculated at a lower cost derived from the crypto purchase price and the estimated selling price. You must deduct additional expenses that take place in the process. Remember, broker traders that frequently buy or sell cryptocurrencies will value their inventory at fair value, subtracting selling costs.

How do you Account for Crypto in Accounting?

Cryptocurrency being an intangible asset is accounted for easily. The methods include calculating employing two approaches. Namely: cost and revaluating model (IAS 38).

Cost Model

The cost model activates when the crypto market is non-active. A cost model forms when combining initial recognition, subsequent recognition, and cryptocurrency impairment. In this model, all the intangible assets, including cryptocurrencies, are initially documented at the cost you paid for them, that is, the purchase price and commission.

After that, they remain on the ledger at the same price or the values update in response to market prices. However, you must check whether the cryptocurrency decreases in value, for the loss will documented in your financial report as an expense.

Revaluation Model

On the other hand, the revaluation model activates if the market is active and exists for cryptocurrency. This model leads you to update the crypto value in response to the current market price. The value going up will mention the increase in the special section in your financial report. Whereas, the value going down will appear as an additional expense in the report. Note: all cryptocurrencies do not encounter active markets, so this method is always a side option.

The revaluation model leads you to figure out the fair value (IFRS 13). It is the price you get after selling cryptocurrency or the amount you pay to transfer a liability. Fair value determination is done in a straightforward and normal way between sellers and buyers. You can calculate the fair value by:

• Looking at current market prices where the cryptocurrency is actively traded.
• Getting quotes from brokers.
• Using other methods like estimating future cash flows and then adjusting them to today’s value.

In addition, accounting for cryptocurrency further expands to explain the concept of amortization and disclosure. The former involves the lowering of the asset value over time (FRS 102). While the latter is disclosing the decisions about cryptocurrency accounting to the financial statement readers (IAS 1).

Accounting for Cryptocurrency GAAP

The Financial Accounting Standards Board (FASB) updated the US accounting rule, namely US GAAP, in December 2023. The new regulation, ASU 2023-08, declares that intangible cryptocurrencies report their current fasb crypto fair value from now on. It does not matter whether there is an increase or decrease in the value; the company must mention it in its profit or loss statement.

On the other hand, before this rule came out, companies mostly recorded cryptocurrencies only at the purchasing cost, accounting for value loss. Additionally, businesses were not allowed to revalue according to market shifts.

Accounting Software for Cryptocurrency

Accounting software for cryptocurrency manages the accounting process. The tasks, such as cryptocurrency transactions, generating financial reports, and related activities, become automated and effortless. Some of the famous and reliable accounting software are:

• CryptoAccountant
• Bitcoin Accounting
• Tax
• Accounting Seed
• Zoho Books
• Xero
• CoinTracking
• CryptoGo

Wrapping Up: Accounting for Cryptocurrency

It is of no use to implement traditional accounting standards because accounting for cryptocurrency requires skill, patience, and in-depth understanding. For crypto accounting, put efforts into learning the concepts, such as measurement, recognition, and disclosure. This guide highlights the importance of accounting for digital money. In addition, it mentions some accounting software to aid you in managing regulatory requirements and market developments.

FAQs

What are the accounting methods for cryptocurrency?

There are three methods you can use for cryptocurrency accounting. These are FIFO (first-in-first-out), LIFO (last-in-first-out), and HIFO (highest-in-first-out). These methods readily help you calculate gains and losses. 

Which Account is Best for Cryptocurrency?

Cryptocurrency accounts are many in the market. Each has its significance. You can choose from the options, such as Coinbase, Crypto.com, Finblox, and Binance.

How do you record crypto in accounting?

Cryptocurrency does not have any physical value. You must record it on the balance sheet as an intangible asset, mentioning cryptocurrency at its purchasing cost and not at its fair market value.