Cryptocurrency has become a significant part of the modern financial landscape, with its growing popularity as a digital asset class. As more individuals and businesses are engaging in cryptocurrency transactions, it's important to understand the fundamental accounting principles and practices associated with this emerging form of digital currency.

In this comprehensive guide, we will explore the Accounting for Cryptocurrency basics, including key concepts, best practices, and considerations for businesses and individuals. IFRS and GAAP various standards help understand the nature and category under which cryptocurrency should be categorized.

What to Expect from the Reading Accounting Basics for Cryptocurrency?

·        Why is crypto an Intangible Asset?

·        Why not cash or cash equivalent?

·        Possible double entries and tax treatment.

Here is a little background, and a later section will explain Accounting for Cryptocurrency for recording.

Cryptocurrency is often perceived as a cash and cash equivalent or monetary item; as it acts as a medium of exchange, but here is why cryptocurrency does not fall in cash and cash equivalent.

The IFRS standards IAS-07 and GAAP standards explain cash and cash equivalent as;

1.      Readily convertible to cash and has a relatively known value.

2.      And are subject to low or zero risk.

Under the provision of these standards, Accounting for Cryptocurrency cannot be categorized as cash and cash equivalent as cryptocurrency is subjected to high risk and is extremely volatile in nature.

It might appear that crypto can also be accounted for as a financial asset at the fair market through profit and loss. IFRS 9 explains financial assets to be contracts that establish the right to receive cash or other financial assets. It also is not a debt security or equity instrument of another entity.

Classification and Valuation While Accounting for Cryptocurrency

Cryptocurrencies are considered intangible assets and should be classified and recorded in accordance with generally accepted accounting principles (GAAP) or international financial reporting standards (IFRS). The initial acquisition of cryptocurrencies should be recorded at their fair value while Accounting for Cryptocurrency, which is typically the purchase price, and subsequent transactions should be recorded at fair value as well.

Valuation of cryptocurrencies can be complex due to their volatile nature and the absence of a centralized market. Businesses and individuals should establish a consistent and reliable valuation method and apply it consistently when Accounting for Cryptocurrency.

However, cryptocurrency falls under the definition of an intangible asset explained by IAS 38 and GAAP standards. These standards explain intangible assets as non-monetary, separately identifiable assets without physical form. Separately identifiable means it can be divided from an entity and can be sold, transferred, rented, or exchanged separately or in contract with other assets.

It also corresponds with the IAS 21 'Effect of foreign exchange rate', which states that an essential feature of non-monetary assets is the absence of the right to receive determinable units of currency.

Thus, under both these conditions, it appears that while accounting for Cryptocurrency, cryptocurrency should be treated as an intangible asset.

Accounting for Cryptocurrency

Initially, when crypto is acquired, it is measured at cost, as an intangible asset subject to a major change in its value is checked for impairment. However, there is a difference in how intangible assets are accounted for in IFRS and GAAP.

After initial measures when accounting for Cryptocurrency, the cryptocurrency is impaired to its fair value when the value changes. When the value of crypto decreases, the books are updated for that increase, and an impairment loss is recorded. According to GAAP standards for an intangible asset, the impairment losses, once recorded, are never reversed. The later increased amount is accounted for as capital gain, and subsequently taxable as a capital gain.

Consider that you have purchased crypto for $400000 fiat money or through a bank you will debit a particular crypto asset and credit cash or bank by $400,000. Now, if after a certain time, it devalues to $200000, you will reduce the crypto asset by crediting the asset by $200000 and debiting loss by $200000.

Now consider you paid your vendor through crypto at that time; the crypto value was $400,000; as per GAAP, you will debit expenses by $400000 and credit assets by book value which in this case is $200,00. And then for the other $200000, you will credit capital gain.

Crypto Mining and Other Areas Subjected to Normal Income Tax

There are other transactions that give rise to income and are taxable under normal income tax that are:

1.      Mining: Mining should be recorded as mining income, and the mined asset should also record.

2.      Crypto stacking

3.     Interest. These are to be accounted for as income under their heads.

Here is a table for journal entries

This is based on the example above:

Accounting for Cryptocurrency under IFRS

Accounting for Cryptocurrency as per IFRS intangible assets are initially recorded at cost and then reduced by amortization and impairment loss. Subsequently, the cost or revaluation model is followed. If there is any increase or decrease in fair value, the asset is revalued to that amount. 

Revaluation loss is recorded in profit and loss. However, the loss should be recorded to other comprehensive income if there is a balance in revaluation surplus for this asset. An increase in value is recorded in other comprehensive income, but an increase in value is recorded in profit and loss up to the extent to offset the previously recorded loss.

Best Practices for Cryptocurrency Accounting

Here are Some Best Practices for Effective Cryptocurrency Accounting

Adopt a Consistent Accounting Method

Consistency is key in accounting for Cryptocurrency. Businesses and individuals should establish and consistently apply accounting policies and methods for classifying, valuing, and recording cryptocurrency transactions. This ensures accuracy, comparability, and compliance with accounting standards and regulations.

Keep Accurate Records

Proper documentation and record-keeping are essential when we do accounting for Cryptocurrency. Keep detailed records of all cryptocurrency transactions, including transaction dates, amounts, wallet addresses, and transaction IDs. This helps with tracking, reconciling, and reporting cryptocurrency transactions accurately.

Reconcile Wallet Balances

Regularly reconcile the balances of your cryptocurrency wallets with your accounting records to ensure accuracy.