Digital assets have skyrocketed in popularity over the last decade, so much so that businesses such as Tesla and Microstrategy are beginning to hold cryptocurrencies such as Bitcoin on their balance sheets. The quick rise in the adoption of cryptocurrency has created a new challenge for businesses and is forcing them to understand crypto accounting.
From asset classification to valuation, there’s no shortage of expertise needed to navigate crypto accounting. We’ll walk through some common misconceptions and how to avoid errors in your crypto accounting.
How Do Generally Accepted Accounting Principles (GAAP) Treat Crypto?
Some business owners may assume that because they are holding cryptocurrencies such as Bitcoin, Ethereum, and Solana as investments, they should account for any price fluctuations over time. In return, they report prices in their books at fair value much like they would for any other investment such as stocks and bonds.
However, under U.S. GAAP, cryptocurrencies are treated as intangible assets that should be recorded at their cost. Like other intangible assets, and unlike investments such as stocks and bonds, this means any impairment in value must be recorded and the value of crypto on a company’s balance sheet can only go down over time.
Using Cryptocurrency to Buy Goods or Services for Your Business
Unlike most intangible assets, digital assets have been used as a medium of exchange. It’s critical for business owners and their accountants to know when digital assets are used to purchase a good or service they must calculate a gain or loss on the digital asset that was exchanged. This is different from transacting in fiat currencies where recording the transaction is as simple as debiting an asset or expense account for the good or service and crediting cash.
For example, your business owns 10 Bitcoin (BTC) for $100,000. Those 10 Bitcoins appreciate in value and are now worth $150,000. Instead of paying for your financial statement audit in cash, which costs $150,000, you opt to pay for the audit in Bitcoin. When accounting for this transaction, you must treat it like a disposal of an intangible asset. You’ll debit your desired expense account for $150,000 and credit the Bitcoin account on your balance $100,000. To ensure the entry balances and the gain is properly reflected, you’ll also need to credit $50,000 to a capital gain income account.
Accepting Cryptocurrency for Goods or Services Your Business Sells
The same is true on the flipside of the transaction. If your company chooses to allow customers to purchase goods or services from you in exchange for a digital asset, the digital asset must be recorded at its fair market value at the point of exchange. Once it’s a part of your treasury and becomes a part of your balance sheet, it will go through the impairment process with all other intangible assets on your books.
Crypto accounting can be challenging, but the right team on your side can make a world of difference. Before you decide to invest in, accept as payment, or pay with digital assets, we highly recommend reaching out to us! One of our experienced crypto CPAs can assist in ensuring your bookkeeping is set up correctly from the start.
If you have additional questions about choosing the crypto CPA, don’t hesitate to reach out to our team at Founder’s CPA for guidance!