Cryptocurrency Accounting

cryptocurrency accounting

The cryptocurrency began to circulate in 2009. One of the most popular cryptocurrencies is Bitcoin, followed by Etherium.

Since then, people worldwide make money with this virtual currency. They either earn through mining or investing in fiat currencies.

Thus, these people must account for their holdings or trading properly. It could be that they might even pay taxes for such investments and trades.

But, what is cryptocurrency exactly?

Cryptocurrency Explained

Cryptocurrency is a virtual medium of exchange. It is stored in the blockchain with a decentralized system of monitoring. Like accounting, cryptocurrency uses a sort of ledger electronically.

People use it to buy commodities and earn income from this cryptocurrency. However, it is not a real currency if you will use the legal and financial definition of money.

Thus, accountants, tax consultants, and financial analysts need a new economic language level to classify cryptocurrencies. Since it is not a conventional medium, you need to understand its nature.

Furthermore, the decentralized way of handling, monitoring, and circulating these currencies in the virtual world makes accounting a complicated matter.

Financially speaking, cryptocurrency is not a currency because it is not:

  • the same as fiat currencies such as dollars, euros, won, yen.
  • accepted as a monetary unit for its lack of physical aspect.
  • used as the basis of measurement as businesses use their fiat currency to produce financial reports.

Then, how do you account for cryptocurrency?

Accounting for Crypto Holders

There are different ways to do cryptocurrency accounting, depending on your purpose.

As Inventories

For those who trade cryptocurrency, you could use IAS 2, Inventories. When you say trade, holders engage in buying and selling. From these trades or transactions, you earn an income.

Thus, you can treat it as a current asset under the Inventory. The valuation is fair value less any cost to sell the asset.

As Intangible Assets

If you aren’t trading cryptocurrency but hold it for other purposes such as value appreciation, you could treat it as intangible assets (IAS 38). Cryptocurrency passes all criteria of an intangible asset.

First, it is an identifiable asset. Despite being part of a blockchain or a more extensive network, a cryptocurrency is separable and identifiable to the person holding the asset. Also, anyone can trade the crypto virtually with others.

Second, cryptocurrency is non-monetary. Still, you need to value it, using the impairment method to reflect its real worth in virtual trading.

Third, cryptocurrency doesn’t have a physical substance. It exists digitally. Like an intangible asset, this digital money has a useful life. In this case, it is an indefinite one.

However, crypto is not subject to amortization since you can’t identify the exact useful life. Thus, you use impairment valuation to reflect its “fair market value.”

Accounting for Crypto Miners

cryptocurrency accounting

Mining is another complicated aspect of cryptocurrency accounting. It has a different meaning as compared to the traditional method. Thus, IFRS 6 (Mineral Resource Valuation) might not be applicable.

So, what happens in crypto mining? People’s transactions are recorded in a digital ledger. Everyone is given copies of the ledger and the transactions. When a ledger becomes big enough, it converts into blocks. These blocks form a chain.

Miners validate transactions within the blockchains using cryptography. They ensure all transactions are reliable, not duplicated, and safe. After validation, miners include the transactions into the chain.

Aside from verification, they create new blocks and update the ledger. These tasks entitle them to receive transaction fees and/or rewards. Miners receive these in cryptocurrencies.

Blockchain Rewards

Miners of cryptocurrencies receive revenue for their services. These services are a lot like revenue derived from contracts (IFRS 15). However, there’s no actual counterparty.

Miners receive the reward through a sophisticated algorithm. You can’t consider the algorithm as the second party in each contract.

So, IFRS 15 does not apply. However, you can use the impairment method to account for the rewards as income/loss (credit side), debiting Intangible Assets. In this case, IAS 38 applies.

Transaction Fees

These are a different matter. Since most transaction fees are specific, you can establish a contract between the miner and the person who initiates the transactions.

The transaction or the agreement, albeit virtual, couldn’t happen without paying a fee. Therefore, you can use IFRS 15 to account for the costs as revenue for the miner.

You can debit Inventory or Intangible Assets and credit Revenue.

Pool Miners

In addition to IFRS 15, you should also look at IFRS 11 (Joint Arrangements), especially if you’re a pool miner. Being a pool miner means you are sharing the expenses related to mining with other people.

Pool mining is common because the technology for this task is expensive. It requires a large sum of money. Unless you’re a millionaire or a billionaire, you’ll need other people to split the costs (and revenue).

Final Words About Cryptocurrency Accounting

Cryptocurrency accounting is a complicated process. Although the reporting framework has comprehensive coverage, there are still a lot of factors at play. As a cryptocurrency holder or miner, it’s best to account for all revenue sources, even they’re found digitally.

Leave a Reply

Your email address will not be published.