Detailed Explanation of New Changes in US Cryptocurrency Accounting Rules What Impact Does It Have on MicroStrategy, Coinbase, and Others

US Cryptocurrency Accounting Rule Changes Impact on MicroStrategy, Coinbase, and Others

Author | TaxDAO

We believe that the new accounting rules for crypto assets will have the following impacts:

From an accounting perspective, the adoption of fair value measurement for cryptocurrencies means a more unified and transparent accounting treatment. Although the new guidelines may bring significant fluctuations in the earnings of companies that invest heavily in cryptocurrencies, for most companies that hold crypto assets for appreciation purposes, the information disclosure through fair value guidelines and the detailed disclosure of crypto assets held by the company in the financial statements can better reflect the impact of these assets on the financial condition of the holders, reflect the economic essence of digital assets, and enable better decision-making for company managers and investors.

From a tax perspective, considering that capital gains tax is levied only on realized capital gains, the determination of the asset cost at the time of asset disposal (transfer or sale) affects the realized capital gains. This can be done using methods such as first-in-first-out or weighted average cost. Therefore, using historical cost or fair value in accounting for the subsequent measurement of crypto assets held does not affect the realized capital gains or the capital gains tax payable. However, when fair value measurement is adopted, it is necessary for accounting to accurately distinguish between realized and unrealized capital gains during the accounting period in order to accurately declare them for tax purposes.

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In terms of accounting software, compared to traditional financial products such as bonds and stocks, cryptocurrencies have a wide variety, large and frequent price fluctuations, and diverse business scenarios. Therefore, whether using the cost method or fair value measurement in accounting, it poses a greater challenge for accounting software. Compared to the cost method, fair value measurement requires the periodic determination of whether the value of held crypto assets has changed and the recognition of corresponding fair value changes in profit or loss. This requires accounting software to track and measure the value changes of crypto assets in different categories throughout the accounting period, in order to accurately account for the changes in value and the realization of capital gains.

Of course, not all crypto assets are included in the new regulations, such as non-fungible tokens (NFTs) and wrapped tokens. As committee member Susan Cosper said, the narrower the scope of the new regulations, the easier it is to implement quickly.

The United States’ relevant financial and tax policies regarding cryptocurrencies have always been a reference for other countries and regions around the world. The introduction of the new regulations may gradually eliminate the current situation where the accounting rules for cryptocurrencies among countries are unclear and inconsistent.

Earlier reports stated:

The Financial Accounting Standards Board (FASB) has proposed new standards for crypto assets, suggesting that they be measured at fair value. The current accounting standards under the U.S. Generally Accepted Accounting Principles (GAAP) treat crypto assets as “indefinite-lived intangible assets” and require impairment losses to be recognized and included in the income statement when the price falls, while subsequent reversal of impairment losses is prohibited. In other words, companies can only report a decrease in the value of their crypto assets and are unable to report increases until the crypto assets are sold. This is based on the conservatism principle but does not reflect the true value of crypto assets. If the FASB’s proposal is adopted, crypto assets will be measured at market prices, which can significantly increase MacroStrategy’s net profit on the books when the prices rise. This article also deducts impairment losses of crypto assets when calculating EBIT.

Here is the full report from Bloomberg:

Long-Awaited Bitcoin Accounting Rules to Capture Rises, Dips (2)

By: Nicola M. White

Published on: September 6, 2023

Article Source:

https://news.bloombergtax.com/financial-accounting/long-awaited-bitcoin-accounting-rules-to-capture-rises-dips

• Fair value accounting rules to take effect from 2025

• Wrapped tokens excluded from final rules

The US accounting standard-setters unanimously voted on Wednesday to adopt long-awaited accounting rules for cryptocurrency companies and other entities holding significant amounts of digital currency to measure the value of their holdings in Bitcoin, Ethereum, and other cryptocurrencies.

Under the new rules expected to be released by the end of the year, companies that hold or invest in cryptocurrencies will be required to report their holdings at fair value, including the rebound in value after price declines, which is an accounting rule designed to capture the latest value of assets. Companies and accountants have been telling the Financial Accounting Standards Board for months that while the new rules will bring fluctuations in income for companies with significant investments in cryptocurrencies, the ability to record recoveries will be an improvement over current practice.

FASB member Christine Botosan said, “It’s not often that we get an opportunity to simultaneously reduce system costs and improve the decision-usefulness of the information, but this makes it very easy to achieve both.”

FASB agreed that these rules will be effective no earlier than 2025, but companies can choose to adopt them early.

Gaps in the Rulebook

In the US accounting rulebook, there is no specific section that outlines how companies like software manufacturer MicroStrategy, car manufacturer Tesla, or cryptocurrency exchange Coinbase should identify and measure their holdings of digital currencies.

Currently, these companies follow the practice guidelines of the American Institute of Certified Public Accountants, which categorizes most cryptocurrencies as intangible assets. This category includes items such as trademarks, copyrights, and brands, which, unlike cryptocurrencies, are rarely traded. This means that these companies record their cryptocurrencies at the historical prices they paid and assess the impairment or decrease in value of their holdings every quarter. If the price of Bitcoin temporarily declines during this period, it is considered impaired. If the market recovers, these companies are unable to upwardly adjust the value.

MicroStrategy is the publicly traded company with the most holdings of cryptocurrencies and is typically affected by this accounting method.

MicroStrategy’s CFO Andrew Kang wrote to FASB in May, responding to the initial proposal by the accounting board, stating that reporting cryptocurrencies at fair value “will allow us to provide investors with a more relevant view of our financial condition and the economic value of our Bitcoin holdings, which in turn will help investors make informed investment and capital allocation decisions.”

Starting from the fiscal year after December 15, 2024 (including the transition period of these years), all companies, whether they are public or private, must comply with accounting rules. This means that calendar year-end companies will adopt these rules in 2025. Once FASB formally releases these rules later this year, companies will be allowed to adopt them.

Companies have been required to list intangible assets as an item in the balance sheet. Under the new rules, companies must separately record their holdings of cryptocurrency so that investors and other readers of financial statements can clearly understand the company’s investment in cryptocurrencies.

In addition, companies will disclose a significant amount of held cryptocurrencies and any restrictions on these holdings in footnotes for each reporting period. Annually, companies must reconcile or disclose changes in the initial and ending balances of cryptocurrency assets by category. FASB agreed on Wednesday that companies do not need to include cryptocurrency assets received as payment and immediately converted to cash in the reconciliation activities.

Furthermore, FASB agreed that since cryptocurrencies will be measured at fair value, companies will comply with the disclosure requirements in ASC 820 of applicable accounting rules to provide financial statement readers with an understanding of how the measurement results are derived.

A long journey

Since 2017, FASB has rejected three separate requests to establish rules for cryptocurrencies, citing that there are too few companies using Bitcoin in a substantive manner. The committee changed its stance after major companies such as Tesla and MicroStrategy started investing in blockchain transaction assets.

The committee’s focus is narrow, covering only assets created on or residing on distributed ledgers using blockchain technology and secured through encryption. Currently, under the definition of US accounting rules, cryptocurrency assets must be classified as intangible assets and be fungible, meaning they can be exchanged with similar assets.

Non-fungible tokens (NFTs) – unique digital tokens that can be anything from video clips to digital sports trading cards – will not be subject to the rules. Stablecoins and wrapped tokens (digital tokens that allow cryptocurrencies in one blockchain to be used on another blockchain) are also not included.

Multiple groups, including the Big Four accounting firms, have pressured FASB to include wrapped tokens in the rules, claiming that their holding purposes are similar and their transaction prices are similar to the underlying cryptocurrency assets.

On Wednesday, most committee members expressed the need for more information about the market before expanding the committee’s scope and rejected calls to include wrapped tokens.

FASB member Susan Cosper said, “Narrowing the scope of the regulations intentionally does help us get this information out to investors more quickly.”

FASB stated that it will continue to monitor the cryptocurrency market and take additional action as necessary.

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