Cryptocurrency Accounting

How should companies be accounting for holdings of Bitcoin, Ethereum, and what seems to be hundreds of other cryptocurrencies that to come into existence daily now?  The IRS tells taxpayers to treat such currencies as investments, but tax and GAAP don’t always see transactions in the same light.  The SEC focus is on whether coin offerings should follow securities regulation rather than how a company should account for cryptocurrency holdings. Finally, the FASB staff has undertaken pre-agenda research on the topic of cryptocurrency, but proposals on the potential accounting are still a long way away.

In the meanwhile, accountants must actually do the accounting for cryptocurrency held by organizations.  What do we do? First, we should look at definitions of currency in GAAP.

All balance sheets include cash and cash equivalents.  That term is generally thought to include currency, coins, checks received but not yet deposited, checking accounts, petty cash, savings accounts, money market accounts, and short-term, highly liquid investments with a maturity of three months or less at the time of purchase such as U.S. treasury bills and commercial paper. The items included as cash and cash equivalents must also be unrestricted.

One could take the simplistic view and state a cryptocurrency calls itself a currency so it must be currency, but that is a somewhat circular argument no different than me saying a duck must be a goose because I decided to call it a goose no matter how much it quacks.  The dictionary defines a currency as “a system of money in general use in a particular country.”  If you stick with that definition a cryptocurrency can’t be a currency because it very existence is not related to a country, at least not yet.  Some people may say currency has a second definition of “the fact or quality of being generally accepted or in use” but if you go further that definition is not about monetary transactions.

But could a cryptocurrency still be a cash equivalent as “a short-term highly liquid investment?”  I think the answer is no because such investments generally mean investments that must be redeemed for currency after a set period would rarely, if ever, lose value in terms of an origination’s functional currency.  Cryptocurrencies do not seem to fit either of those requirements.

That leads us to consider treating cryptocurrencies as investments. Such a treatment seems consistent with the SEC focus on treating coin offerings as securities offerings that need to abide by offering regulations. And keep in mind that the IRS has already decided that crypto-currencies are investments for tax purposes, so tax accounting and GAAP accounting would align if cryptocurrencies are treated as investment.

For now, all signs point to treating cryptocurrencies as investments, but the FASB may have the final word on the topic.

Of course, there is one more accounting consideration think about.  GAAP defines functional currency as the main currency used by a business or unit of a business. Functional currency is the monetary unit of account of the principal economic environment in which an economic entity operates.  If Bitcoin or Ethereum ever meets the definition of a currency, I can’t wait to see the first organization that publishes audited financial statements using a cryptocurrency as a functional currency because that is the principle economic environment the organization operates in.  Such financial statements would be the ultimate representation of a borderless multinational organization which will make some people deliriously happy and other cringe with fear.

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