Bitcoin was first introduced in 2008 via its whitepaper and since that time there have been over 15,000 cryptocurrencies with a global market cap of $2.4T in December 2021, up from a market cap of $1.1T in January 2021. The cryptocurrency craze is seeming to be less trend and more of a growing medium of exchange; businesses are even jumping in and accepting these forms of payment for goods and services. Visa conducted a survey in January 2022 noting that 82% of small businesses said they plan to accept some form of digital option in 2022 and 73% said accepting new forms of payments is fundamental to their business growth. From accepting more established offerings to MemeCoins, new taxation and reporting challenges are occurring every day for individuals and corporations holding digital assets.
Regulations that have been passed to date don’t necessarily fit the unique technology used by digital assets and the difference related to traditional markets. This has not stopped regulators from enacting new guidance related to taxation through the Infrastructure Investment and Jobs Act in November, which requires a broker to report transactions with each user to the IRC as well as reporting by any individual who receives physical cash with a value in excess of $10,000. More insight on the Infrastructure Investments and Jobs Act and its implications on digital currency can be found in this article. Additionally, the FASB announced in December 2021 that they would research how to account for and disclose digital assets due to repeated requests by investors and other users of financials. The FASB will likely be adding this project to its technical agenda as early as 2023.
Financial Reporting Requirements for Digital Assets
Financial reporting requirements under US GAAP can be confusing as to how digital assets are to be reported and measured. When a business decides to accept cryptocurrency as a form of payment for a service or good, the company is required to value the digital asset at the time of contract inception under noncash consideration rules of ASC 606. This means the fair value of the digital asset should be measured at the time when all requirements of ASC 606-10-25-1 (Step 1 of the ASC 606 revenue recognition process) have been met as the transaction price. Subsequent changes in value (impairment only) are recorded as an operating loss and not revenue.
Another issue is when and how the digital asset is used by the company. If it’s converted to another digital asset or fiat currency, then a taxable event has occurred and is subject to short-term or long-term capital gain treatment based on how long the digital asset has been held.
Digital assets are held on the balance sheet as an indefinite-lived intangible asset under ASC 350 subject to further impairment analysis based on triggering events with recovery only possible upon sale of the underlying digital asset. These same rules apply to a business that purchases digital assets with cash. There are some exceptions to the classification of digital assets related to companies that qualify as broker-dealers and investment companies. It is important to remember that each acquisition of a digital asset represents a unit of account for impairment testing purposes and therefore adequate recordkeeping is necessary.
Action Items
Companies should create policies to address the following items:
- Ensure IT security policies and safeguarding of assets are enabled
- Decide how cryptocurrencies will be accepted for payment (either through a third party or directly)
- Develop a strategy for holding cryptocurrencies (long-term store of value or crypto for profit)
- Select an individual in the organization who will be responsible for tracking all company digital asset activity and monitoring the market
- Identify legal, finance, and tax experts to navigate the changing regulatory landscape
While cryptocurrencies are not new, many individuals and businesses still do not understand them in detail. These digital assets are here to stay, and it is equally apparent that there will continue to be additional scrutiny and clarification from regulators on taxation and reporting requirements in the future.
We’re Here to Help
Bennett Thrasher’s professionals help clients navigate complexities such as digital assets and ensures that they are in compliance. To learn more about our services, contact Noah Hagerman or Brian Hamm by emailing [email protected].
The above information is general in nature and should not be relied upon for any specific tax implication or investment decision. Actual results may differ, and readers are cautioned not to place reliance on these general observations. Consult with your adviser or counsel before undertaking any specific action.
