A detailed explanation of the new changes in cryptocurrency accounting rules in the United States and how they affect MicroStrategy Coinbase and others

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

In terms of accounting, the requirement for cryptocurrencies to be measured at fair value means that the accounting treatment is more uniform and transparent. Although the new standard will bring greater volatility to the earnings of companies that invest in cryptocurrencies in large quantities, for most companies that hold crypto assets in order to obtain asset appreciation, the disclosure of information under the fair value standard and the requirement to disclose detailed information on the crypto assets held by the company in the notes to the financial report can more appropriately reflect the impact of these assets on the financial status of the holders, reflect the economic substance of the digital assets, and make better decisions for corporate managers and investors.

In terms of taxation, it is considered that capital gains tax is only levied on realized capital gains, and what affects realized capital gains is the way in which the cost of assets is determined at the time of asset disposal (transfer or sale), such as according to the first-in-first-out method or the moving weighted average method. Therefore, the subsequent measurement of the holding period of cryptocurrencies held using the historical cost method or fair value in accounting does not affect the realized capital gains and the capital gains tax payable. However, when fair value measurement is adopted, it is necessary to be able to accurately distinguish between realized and unrealized capital gains in the accounting period, so that tax can be accurately declared.

In terms of accounting software, compared with traditional financial products such as bonds and stocks, cryptocurrencies have a wide variety of types, large and frequent price fluctuations, and rich business scenarios, so it is a big challenge for accounting software regardless of the use of cost method or fair value measurement in accounting. Compared with the cost method, fair value measurement requires periodic determination of whether there is a change in the value of the crypto assets held, and the corresponding fair value change gains and losses are provided. This requires accounting software to be able to track and measure the changes in the value of crypto assets according to different categories throughout the accounting period, so as to accurately account for the changes in value and the realization of capital gains.

TaxDAO is also currently working on Intax, a tax software that can well meet the above accounting and tax reporting requirements, and has more other functions. In order to make it easier for companies that hold or invest in cryptocurrencies to make the financial accounting of cryptocurrencies easier, the accounting data more timely and accurate, and the tax declaration more convenient. Helping large companies that may be afraid to hold cryptocurrencies on their balance sheets due to the complexity of accounting techniques enter the cryptocurrency market.

Of course, the new rules do not include all crypto assets, such as digital collectibles (NFTs) and wrapped tokens. As committee member Susan Cosper pointed out, the narrower the scope of the new rules, the easier and faster they can be implemented.

The U.S. fiscal and tax policies related to cryptocurrencies have been a reference for the rest of the world. The introduction of the new regulations has the potential to gradually eliminate the current ambiguity and inconsistency in the accounting rules for cryptocurrencies among countries.

Here's the full Bloomberg report:

The long-awaited Bitcoin Accounting Rules for Capturing Ups and Downs (2)

作者：Nicola M. White

Originally published on: September 6, 2023

Article from:

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

• The fair value accounting rules are effective from 2025
• Wrapped tokens are excluded from the final rule

U.S. accounting standard-setters voted unanimously on Wednesday that cryptocurrency firms and other businesses with large holdings of digital currencies will receive long-awaited accounting rules to measure the value of their holdings of Bitcoin, Ethereum and other cryptocurrencies.

Under the new rules, which are 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 a rebound in value after a price decline, an accounting rule designed to capture the latest value of an asset. Companies and accountants have been telling the Financial Accounting Standards Board for months that while the new standard will bring volatility to the earnings of companies that invest heavily in cryptocurrency, the ability to record recovery rates will be an improvement over current practices.

"It's not often that we're able to reduce the cost of the system and increase the decision-making usefulness of the information at the same time, but it makes it very easy to do both," said Christine Botosan, a member of the FASB. ”

The FASB agrees that the rules will go into effect as early as 2025, but companies can choose to apply them earlier.

Gaps in the rulebook

There is no section in the U.S. accounting rulebook that specifies how companies such as enterprise software maker MicroStrategy, automaker Tesla, or cryptocurrency exchange Coinbase should identify and measure the digital currencies they own.

Currently, these businesses follow the American Institute of Certified Public Accountants' practice guidelines by default, which treats most cryptocurrencies as intangible assets. This category includes items such as trademarks, copyrights, and brands, all of which are rarely traded, unlike cryptocurrencies. This means that these businesses record their cryptocurrencies at the historical price they have paid and assess their holdings quarterly for impairment or decline in value. If the price of Bitcoin falls briefly during this period, it is considered a loss. If the market recovers, these companies will not be able to revise their values upwards.

MicroStrategy is the largest cryptocurrency holder on the market, and the above accounting methods often affect its earnings.

MicroStrategy's CFO, Andrew Kang, wrote to the FASB in May in response to the original proposal by the Board of Accountants, stating that reporting cryptocurrencies at fair value "will allow us to provide investors with a more relevant view of our financial position and the economic value of our Bitcoin holdings, which in turn will help investors make informed investment and capital allocation decisions."

For financial years beginning after December 15, 2024 (including transition periods for those years), all companies, whether public or private, are required to comply with accounting rules. This means that calendar year-end companies will adopt these rules in 2025. Companies will be allowed to adopt these rules once the FASB officially publishes them later this year.

Businesses are already required to list intangible assets as an item in their balance sheet. Under the new rules, businesses must keep separate records of their crypto assets so that investors and other readers of the financial statements have a clear picture of how much the company has invested in cryptocurrencies.

In addition, businesses will disclose significant holdings of cryptocurrencies and any restrictions on those holdings in a footnote for each reporting period. Each year, businesses must reconcile or disclose changes in the opening and closing balances of cryptoassets by category. The FASB agreed on Wednesday that businesses are not required to include information about crypto assets received as payments and immediately converted into cash in reconciliation activities.

In addition, the FASB agrees that since cryptocurrencies will be measured at fair value, the Company will comply with the disclosures required in the applicable accounting rule ASC 820 so that readers of the financial statements can understand how the Company arrived at the measurements.

It's been a long journey

Since 2017, the FASB has denied three separate requests to set rules for cryptocurrencies on the grounds that too few companies are using Bitcoin in a substantive way. After big companies like Tesla and MicroStrategy started investing in blockchain trading assets, the committee changed its tune.

The committee's focus is narrow, covering only assets that are created or reside on a distributed ledger based on blockchain technology and secured through cryptography. Cryptoassets must currently be classified as intangible assets and be fungible as defined by US accounting rules, meaning they are interchangeable 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) are also excluded.

Multiple groups, including the Big Four accounting firms, have pressured the FASB to include wrapped tokens in the rules, saying they are held for similar purposes and trade at similar prices to the underlying crypto assets.

On Wednesday, a majority of committee members said they needed more information about the market before expanding the scope of the committee's work and rejected calls to include wrapped tokens.

Susan Cosper, a member of the FASB, said: "The deliberate narrowing of the scope of the regulations has really allowed us to get this information into the hands of investors more quickly. ”

The FASB said it will continue to monitor the cryptocurrency market and take additional action if necessary.