Cryptocurrency is a medium of exchange, created and stored electronically in the blockchain. One of the most popular ones is Bitcoin. Besides making transactions using this type of currency, people also make money with cryptocurrency. Thus, they need to account for this source of money and possibly pay tax on it.
Yet, cryptocurrency accounting is actually difficult. It literally requires new financial literacy because now you are dealing with blockchains, digital wallets, cryptographical confirmation and a new financial language. Lack of sufficient rules and regulations makes it even more complicated.
Why is cryptocurrency not a currency?
Although cryptocurrency can be used in exchange for some goods and services if the counterparty accepts it, it is not considered a currency when it comes to accounting. Why? Cryptocurrency is not:
- as widely accepted as euros, dollars, rupees, yens, or other currencies;
- used as a monetary unit in pricing goods or services because the pricing is based on “normal” currency from which pricing in cryptocurrency is then derived;
- used as the measurement basis in the financial reports because a business usually creates them in its own currency (local or foreign).
All these factors are against the definition of currency in International Accounting Standard (IAS) 32. Moreover, there is no contract, no counterparty, no legal tender, one is only dealing with a program that participants trust. Consequently, cryptocurrency fails the definition of a financial and cannot be classified as one. This is also supported by the IFRIC decision from June 2019.
How cryptocurrency holders account for cryptocurrency
According to the IFRIC decision from 2019, it is an intangible asset. It meets the definition of an asset. It is separable and can provide economic benefit while lacking physical substance. Most cryptocurrencies have an indefinite useful life and, as a result, you do not charge any amortization. Yet, they are subject to an impairment test.
Individuals who are not miners, but rather holders or those who buy cryptocurrency either to hold it or trade it on exchanges will account for cryptocurrency depending on the holding purpose.
- Held for trading
If it is held for trading, for example by cryptocurrency dealers or brokers, then they should apply IAS 2.3b, which guides the commodity brokers. Thus, they should treat cryptocurrency as a current asset and measure it at fair value minus cost to sell.
- Held for other reasons
If the holder has cryptocurrency for other purposes, for example for storage of value or capital appreciation, then IAS 38 should be applied. The holders have a choice to use the revaluation or cost model for the subsequent measurement.
Cryptocurrency accounting for miners
The miners or entities involved in creating and forming cryptocurrency would account for it differently. Unfortunately, IFRIC said nothing about miners, so you need to apply currently existing IFRS to this situation. Some mistakenly assume that crypto miners mine or do some sort of activities similar to mining or extracting a mineral resource and, therefore, apply IFRS 6. In case of cryptocurrency, mining has a different meaning.
What are these miners doing? Some people make transactions in cryptocurrencies, and all these transactions are recorded in a big ledger. No physical money (cash) moves during a transaction, just the record is made in the ledger. Everyone has a copy of that ledger, which includes all the transactions ever made. As the ledger gets big, it is broken down into blocks, which are tied together in a chain using a specific methodology.
To make everything safe, reliable, and free of fraud, a form of digital signature is involved here. Miners validate transactions by the cryptography and include them in blocks. For this, they receive some transaction fees. They also create blocks, verify them, update the ledger, and get a block reward for these activities.
To create a valid block, a lot of computational strength and resources are utilized by the miner. Since the miner provides a service to the blockchain participants, it might seem that IFRS 15 would apply to account for the reward. However, it is awarded by the system algorithm and not by any counterparty. No customer or contract that can be enforced exist, so IFRS 15 does not apply. Thus, the conceptual framework for financial reporting would be applied, and you would consider this reward as income in profit/loss when it arises. In a journal entry, you would debit Intangible Assets or Inventory and credit the Income/Loss account.
The transaction fees, on the other hand, are connected to a particular transaction and not to the entire block. The person who initiates the transaction pays the fees, not the blockchain system algorithm. Thus, you can say that there is a customer and a contract because the transaction will not happen without fee payment. Therefore, IFRS 15 applies here, and you can include the revenue in profit/loss as the miner becomes entitled to that fee. You would debit Intangible Assets or Inventory and credit Revenue in profit or loss.
Miners also have high expenses associated with their work. Since it is impossible to separate expenses for successful and unsuccessful attempts to solve an algorithm, and they actually provide services instead of creating intangible assets (even if it is eventually a result), the expenses are not capitalized as internally developed assets. Instead, as they incur, expenses should be included in profit/loss, according to current IFRS standards. If you are a pool miner and not acting as a single miner, watch out for the IFRS 11.
