LONDON / NEW YORK (Reuters) – Large corporations from automaker Tesla Inc to business intelligence firm MicroStrategy Inc have traded billions of dollars in cash for Bitcoin in the past few months.
Still, hurdles remain to quickly start a broader trend of large companies holding Bitcoin, from cryptocurrency volatility to reputational risk, chief financial officers and accountants told Reuters. Main story:
Here are some of the most important questions about cryptocurrency accounting and taxation:
HOW DOES CRYPTO INVOICING WORK?
The accounting rules used by US companies do not specifically relate to cryptocurrencies like Bitcoin.
According to the guidelines of the US auditing company from 2019, companies account for Bitcoin according to the rules for “intangible assets” such as intellectual property.
Companies record the value of Bitcoin in their accounts at the time of purchase. If the price goes up, they won’t be able to log those profits until they sell. However, if Bitcoin’s value goes down, the company must write off the value of its holdings as an impairment loss.
Outside of the United States, where companies operate under separate rules, crypto is accounted for differently.
Companies that have digital coins for sale in the normal course of business will hold them as inventories at cost. Others, like broker-traders, can hold such stocks at market value, said the International Financial Reporting Standards Foundation, which sets rules for most non-U.S. Companies.
Other companies hold their cryptocurrencies as intangible assets, like in the US. However, you can reverse any depreciation to the original cost if the value of the coin rises again. In some other cases, companies that record crypto as an intangible asset can measure the value of their crypto holdings at market value.
WHAT DO TESLA AND OTHERS DO?
Most of the publicly traded companies that keep Bitcoin on their balance sheets are specialized cryptocurrency or blockchain companies, according to Bitcoin Treasuries bitcointreasuries.org.
But last month, Tesla became the most prominent mainstream company, switching some of its coffers from cash to Bitcoin and placing a $ 1.5 billion bet on the digital currency.
A government filing said Bitcoin would be accounted for as an “intangible asset with indefinite lifespan” and warned that if its price fell, it could be depreciated.
MicroStrategy Inc, led by Bitcoin advocate Michael Saylor, holds around 91,000 Bitcoin. According to a Reuters calculation, the holdings are worth around $ 4.6 billion.
It analyzes Bitcoin prices on cryptocurrency exchanges every quarter, with any loss in value of the asset after purchase results in a decrease in value, according to a securities file from last month.
The payment company Square Inc has also converted large parts of its balance sheet into Bitcoin, with boss Jack Dorsey promising to “double” his commitment to the cryptocurrency.
Square says it will recognize any decline in market prices below the original cost as an impairment charge, but in accordance with accounting standards, it will not increase in value if the price increases.
In its most recent regulatory filings, Square detailed some of the security and custody risks associated with Bitcoin. Loss of access was listed as an operational risk, and a hack or loss of data could potentially compromise trust in the company.
It also counted Bitcoin’s volatility and degradation among its legal, regulatory, and compliance risks.
AND WHAT ABOUT THE TAX?
Cryptocurrencies are treated as property under US tax regulations.
Companies can be subject to capital gains tax when selling a cryptocurrency. The amount paid depends on how long you held the coin and the market value at the time of the transaction.
MicroStrategy warned in a filing with US regulators last month that it could face a tax bill on any profits it makes from the sale of Bitcoin and that “such a tax liability could be substantial”.
Other large countries follow similar rules.
In the UK, for example, the type of tax paid on trading digital currencies or accepting payments in crypto depends on who is involved in the deal, according to the UK tax authority.
Such activities are likely to incur capital gains tax, corporation tax, or other charges, it said.
(This story is repositioned to correct typing errors in the heading)
Reporting by Tom Wilson and Anna Irrera in London and Jessica DiNapoli in New York; Editing by Pravin Char