Crypto assets, know the accounting rules for this type of assets
Crypto assets are intangible digital assets whose value is given by the market and are transferred in digital systems, which use advanced cryptographic technology to guarantee the integrity of the system.
There are two types of crypto assets:
1. Cryptocurrencies are digital or virtual currencies encrypted to secure financial transactions and create units of exchange. They are probably the best-known crypto assets and have different functionalities, for example, they can serve as a payment method. The first cryptocurrency, bitcoin, began operating in 2009, then others appeared such as Ethereum, Litecoin and many more.
2. Tokens are digital assets that can represent securities, financial products or virtual collectibles. In turn, tokens can be fungible or non fungible (also known as NFTs), the former being units of identical value, impossible to differentiate, and the latter being unique and scarce assets, therefore, they have a higher value than fungible tokens. NFT examples include digital art, music and real estate.
Despite the boom they have experienced in recent years, there is a lack of legislative, tax and accounting rules on what to do when companies handle these types of assets.
Businesses now classify crypto assets as indefinite-lived intangible assets, similar to intellectual property such as copyrights. Companies must review the value of such assets at least once a year and write it down if they drop below the purchase price. If the value were to rise, companies can record a gain only when they sell the asset, not if they continue holding it.
The Financial Accounting Standards Board (FASB), which is the organization in charge of developing accounting standards in the United States, voted on September 6, 2023, to adopt a new standard that would require businesses use fair-value accounting for bitcoin and other crypto assets. This would allow companies to recognize gains and losses immediately and treat digital assets as they would some financial assets instead of as indefinite-lived intangible assets. The standard will be effective for annual reports in 2025. The FASB expects to formally issue the standard at the end of the year.
How should a company register cryptocurrencies and other digital assets?
While cryptocurrency transactions have many complications, they are still an asset and fundamental accounting principles apply. When your company purchases cryptocurrencies, you must recognize the asset on your balance sheet at the fair market value on the date the purchase was made. This is done by recording a debit to the asset account.
When you use cryptocurrencies to pay suppliers, you must record the transaction in the same way as if you had decided to sell it. Either way, it counts as a disposition, so you would recognize a capital gain for the difference between the expense and the carrying value of the digital asset.
Although much remains to be resolved regarding the accounting of digital assets, for now those who own them must comply with the established guidelines and rules disclosed by the entities and companies participating in the crypto assets market. At My Accounting Now we are in continuous training to be at the forefront of accounting news and applicable laws. If you have any questions or would like advice, please contact us by calling 786-228. 8689 or sending an email to info@myaccountingnow.com.