Detailed Explanation of the Impact of New Changes in U.S. Cryptocurrency Accounting Rules on MicroStrategy, Coinbase, and Others

Author: TaxDAO

Source: Wu Says Real

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

In terms of accounting, requiring cryptocurrencies to be measured at fair value means that accounting treatment will be more unified and transparent. Although the new standards will cause significant fluctuations in the earnings of companies heavily invested in cryptocurrencies, for most companies holding crypto assets for appreciation, the information disclosure under the fair value standard and the requirement to disclose detailed information about the crypto assets held in the financial statement notes can more appropriately reflect the impact of these assets on the holders' financial condition, reflecting the economic substance of digital assets, and enabling better decision-making for corporate managers and investors.

In terms of taxation, considering that capital gains tax is only levied on realized capital gains, the determination of asset costs at the time of asset disposal (transfer or sale) affects realized capital gains, such as using FIFO or weighted average methods. Therefore, using historical cost or fair value for subsequent measurement of held cryptocurrencies does not affect realized capital gains or the capital gains tax owed. However, when using fair value measurement, accounting must accurately distinguish between realized and unrealized capital gains within the accounting period to ensure accurate tax reporting.

In terms of accounting software, due to the diversity of cryptocurrencies compared to traditional financial products like bonds and stocks, along with significant and frequent price fluctuations and a variety of business scenarios, whether using cost or fair value measurement poses a significant challenge for accounting software. Compared to cost methods, fair value measurement requires periodic assessment of whether the value of held crypto assets has changed, and corresponding fair value gains or losses must be recognized. This necessitates that accounting software can track and measure the value changes of crypto assets by different categories throughout the accounting period to accurately account for value changes and the realization of capital gains.

Of course, the new regulations do not encompass all crypto assets, as digital collectibles (NFTs) and wrapped tokens are excluded. As committee member Susan Cosper stated, the narrower the scope of the new regulations, the easier it will be to implement them quickly.

The U.S. tax and financial policies regarding cryptocurrencies have always served as a reference for other countries and regions. The introduction of new regulations may gradually eliminate the current ambiguity and inconsistencies in cryptocurrency accounting rules among countries.

Earlier reports from Wu Says pointed out that:

The Financial Accounting Standards Board (FASB) proposed new standards regarding crypto assets, suggesting that crypto assets be measured at fair value. The current accounting standards, following Generally Accepted Accounting Principles (GAAP), treat crypto assets as "indefinite-lived intangible assets," requiring impairment provisions when prices drop, with losses recorded in the income statement, and prohibiting subsequent reversal of impairment losses. In other words, companies can only report declines in the value of their crypto assets and cannot report increases until they sell the assets. This is based on the principle of conservatism but fails to reflect the true value of crypto assets. If FASB's proposal is approved, crypto assets will be measured at market prices, allowing price increases to significantly enhance MacroStrategy's net profit on the books. This article also deducted impairment losses from crypto assets when calculating EBIT.

Here is the full report from Bloomberg:

The long-awaited accounting rules for capturing rises and dips in Bitcoin (2)

Author: Nicola M. White

Originally published on: September 6, 2023

Source:

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

• Fair value accounting rules will take effect starting in 2025
• Wrapped tokens are excluded from the final rules

U.S. accounting standard setters voted unanimously on Wednesday to provide long-awaited accounting rules for cryptocurrency companies and other businesses holding significant amounts of digital currency to measure the value of their holdings in Bitcoin, Ethereum, and other cryptocurrencies.

According to new rules expected to be released by the end of the year, companies holding or investing in cryptocurrencies will be required to report their assets at fair value, including value rebounds after price declines, which is an accounting rule designed to capture the latest value of assets. Companies and accountants have been telling the FASB for months that although the new standards will cause fluctuations in the earnings of companies heavily invested in cryptocurrencies, the ability to record recovery rates will improve compared to current practices.

FASB member Christine Botosan stated, "It is not often that we can reduce system costs while improving the decision-usefulness of information, but this makes it very easy to achieve both."

FASB agreed that these rules will take effect as early as 2025, but companies can choose to adopt them early.

Gap in the Rulebook

There is no specific section in the U.S. accounting rulebook detailing how companies like software manufacturer MicroStrategy, automaker Tesla, or cryptocurrency exchange Coinbase should identify and measure their digital currencies.

Currently, these companies default to following the practice guidelines of the American Institute of Certified Public Accountants, which treats most cryptocurrencies as intangible assets. This category includes items like trademarks, copyrights, and brands, which are rarely traded, unlike cryptocurrencies. This means these companies record their cryptocurrencies at their historical purchase prices and assess quarterly whether their held assets are impaired or have declined in value. If Bitcoin's price briefly drops during this period, it is considered impaired. If the market recovers, these companies cannot adjust the value upward.

MicroStrategy is the publicly traded company with the largest cryptocurrency holdings, and the above accounting method typically affects its earnings.

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

For fiscal years beginning after December 15, 2024 (including transition periods for those years), all companies (both public and private) must comply with the accounting rules. This means calendar-year-end companies will adopt these rules in 2025. Once FASB formally releases these rules later this year, companies will be permitted to adopt them.

Companies have already been required to list intangible assets as a line item on their balance sheets. Under the new rules, companies must separately record their crypto assets so that investors and other readers of financial statements clearly understand the company's investment in cryptocurrencies.

Additionally, companies will disclose the amount of cryptocurrency held and any restrictions on those holdings in the footnotes of each reporting period. Annually, companies must reconcile or disclose changes in the beginning and ending balances of crypto assets by category. FASB agreed on Wednesday that companies do not need to include information about crypto assets received as payment and immediately converted to cash in the reconciliation activities.

Furthermore, FASB agreed that since cryptocurrencies will be measured at fair value, companies will comply with the disclosure requirements outlined in applicable accounting rules ASC 820, so that readers of financial statements understand how the measurement results were derived.

A Long Journey

Since 2017, FASB has rejected three independent requests to establish rules for cryptocurrencies, citing that too few companies were using Bitcoin in a substantive way. The committee changed its stance after large companies like Tesla and MicroStrategy began investing in blockchain-traded assets.

The committee's focus is narrow, covering only assets created or residing on distributed ledgers based on blockchain technology and secured through cryptographic techniques. According to U.S. accounting rules, crypto assets must currently be classified as intangible assets and must be fungible, meaning they can be exchanged for 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 from one blockchain to be used on another blockchain) are also excluded.

Several groups, including the Big Four accounting firms, have pressured FASB to include wrapped tokens in the rules, arguing that their holding purposes are similar and their trading prices are comparable to the underlying crypto assets.

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

FASB member Susan Cosper stated, "Intentionally narrowing the scope of the regulations does allow us to get this information to investors more quickly."

FASB stated it will continue to monitor the cryptocurrency market and take additional action as necessary.