At present, there are no specific accounting standards for crypto assets. Instead, businesses rely on broader guidelines from the International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Practice (GAAP) when it comes to accounting for cryptocurrencies.
Balance sheets are one of the fundamental financial statements that businesses need, along with income and cash flow statements. While income and cash flow statements show a business’s economic activity over a specific period, a balance sheet provides a snapshot of its assets, equity, and debt.
Balance sheets are often referred to as statements of financial position because they give a comprehensive view of a business’s financial situation. They include all journal entries since the inception of the business, making it important to include crypto transactions that impact the financial position.
The need for a balance sheet lies in its ability to provide valuable insights into a business’s financial health and offer key benefits. By comparing balance sheets year-over-year, businesses can track their growth and progress in a measurable way.
Balance sheets also enable the calculation of important financial ratios, such as the debt-to-equity ratio, which indicates a business’s ability to pay off debts with its equity. They also provide information necessary for computing other crucial ratios, such as current assets versus current liabilities, which determine if a business can pay off its debts within 12 months.
Lastly, balance sheets allow for a reasonable evaluation of a business, which can be beneficial when seeking investors or when considering selling the business.
So, how should crypto be treated on a balance sheet? While there are no specific guidelines from the IFRS or GAAP, cryptocurrencies qualify as assets and should be accounted for accordingly. Here are some helpful pointers:
– When purchasing cryptocurrency with fiat money, record the transaction similarly to stock trading activities. Add the digital assets, such as Bitcoin (BTC) or Ether (ETH), to the balance sheet at their fair market value on the purchase date. This will reflect as a debit on the assets account. Since the cryptocurrency was purchased with fiat currency, the cash account should also reflect a credit for the purchase price of the acquired crypto assets.
– When selling cryptocurrency for fiat money, credit the assets account and debit the cash account with the amount of fiat received from the sale. If there is a significant difference between the sale amount and the original purchase price, credit a capital gains account.
– Record unrealized losses based on the accounting rules for intangible assets. If the fair value of a purchased cryptocurrency drops, recognize the loss and reduce the cryptocurrency holdings accordingly. Even if the fair value later increases, the loss cannot be reversed or increased on the balance sheet.
– Record crypto mining income like any other income-generating activity. Credit the mining income account and debit the newly generated digital asset at its fair market value. Account for expenses incurred during mining operations by crediting the cash account and debiting the corresponding asset account.
– When using cryptocurrency to pay suppliers, record it as a disposal and treat it similarly to selling the cryptocurrency. Credit the assets account and recognize a capital gain for the difference between the expense and the book value of the asset.
Tax compliance is an important aspect of accounting for cryptocurrencies. When cryptocurrencies are sold, it is considered a capital disposal and may incur capital gains or losses. Capital gains tax applies when the profits from the sale exceed the purchase price, while capital losses can offset capital gains and reduce tax liability.
Income tax liability also arises when receiving cryptocurrencies as payment. The market value of the cryptocurrency at the time of the transaction should be used to account for it as trading profits, and companies must pay corporation tax on those profits.
It’s worth noting that taxation and accounting rules do not always align. Unrealized losses, for example, require journal entries under both IFRS and GAAP rules but may not be deductible for tax purposes.
To ensure accurate accounting for gains and losses, it is crucial to have transparent and trustworthy financial reporting. This not only allows stakeholders to evaluate a business’s performance and financial health but also ensures compliance with laws. It empowers individuals, companies, and organizations to make informed decisions that contribute to long-term success and sustainability.