Cryptocurrency Use in the USA: A Business Guide

Introduction

The use of cryptocurrencies in the USA is becoming increasingly popular in the business environment, offering numerous advantages such as faster and cheaper transactions, no intermediaries, and access to global markets. However, effective use of cryptocurrency requires understanding accounting, taxation, and regulatory aspects.

1. Understanding Cryptocurrency

Cryptocurrency is a digital or virtual currency that uses cryptography for transaction security.

Types of Cryptocurrency:

Cryptocurrencies can be classified based on various characteristics. The main categories include stablecoins and other cryptocurrencies. Here is a brief description of each category:

• Stablecoins:

Description: These are cryptocurrencies pegged to the value of fiat currency (e.g., USD), precious metals, or other assets. Stablecoins are designed to maintain a stable value and minimize volatility.

Examples: USDT (Tether), USDC (USD Coin), DAI.

• Classic Cryptocurrencies:

Description: These are digital currencies that are not pegged to the value of fiat currency and can show significant volatility. They are usually used for transactions, investments, and as a store of value.

Examples: Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC).

• Altcoins:

Description: These are all cryptocurrencies other than Bitcoin. Altcoins can have various mechanisms, functionalities, and purposes.

Examples: Ethereum (ETH), Ripple (XRP), Cardano (ADA).

• Platform Tokens:

Description: These tokens are designed for use on specific platforms or ecosystems and can provide access to services, pay fees, and participate in governance.

Examples: Ether (ETH) on the Ethereum platform, BNB (Binance Coin) on the Binance Smart Chain platform.

• Utility Tokens:

Description: These tokens provide access to products or services within a specific platform and are typically used within the project’s ecosystem.

Examples: Basic Attention Token (BAT), Golem (GNT).

• Security Tokens:

Description: These tokens represent digital assets backed by real assets, such as stocks, bonds, or real estate. They are subject to securities laws.

Examples: Polymath (POLY), tZERO (TZROP).

• Hybrid Tokens:

Description: These tokens combine characteristics of several types of tokens, such as utility and security.

Examples: Some projects may be assigned unique hybrid tokens that are difficult to classify clearly.

2. Cryptocurrency Accounting: IFRS vs. US GAAP

Cryptocurrency accounting varies depending on the financial reporting standard used by the company. The International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP) have their own features and requirements. The table below shows the main points and differences between IFRS and GAAP in cryptocurrency accounting.

In summary, the key differences are:

• Revaluation: IFRS allows revaluation of intangible assets (including cryptocurrencies) if an active market exists, while GAAP does not permit revaluation after initial recognition.
• Impairment and Recovery: Recovery of intangible asset value is allowed under IFRS if fair value increases. Under GAAP, recovery of value after impairment is not allowed.
• Classification: Under IFRS, cryptocurrencies can be classified as inventory if held for sale in the ordinary course of business. GAAP does not provide such classification, treating cryptocurrencies solely as intangible assets.

However, it is important to add one very significant clarification here (see Section 3).

3. Accounting Standards Update (ASU) No. 2023-08

In December 2023, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) No. 2023-08, addressing the accounting for cryptocurrencies.

The changes introduced by ASU No. 2023-08 become effective on the following dates:

Public Companies:

Changes become effective for public companies for reporting periods beginning after December 15, 2024. This means that the first financial statements that must comply with the new requirements will be for the first quarter of 2025 for companies with a calendar fiscal year.

Private Companies:

For private companies, changes become effective for reporting periods beginning after December 15, 2025. Therefore, the first financial statements that must comply with the new requirements will be for the 2026 fiscal year for companies with a calendar fiscal year.

Early Adoption:

Companies are permitted to adopt the changes early. This means they can start using the new standards before the official effective date if deemed appropriate.

Link to FASB ASU No. 2023-08 Document

Key points and changes introduced by this update:

• Cryptocurrency Classification: Cryptocurrencies are now classified as intangible assets with an indefinite useful life. This highlights the lack of physical form and the long-term nature of cryptocurrencies.
• Initial Measurement: Initial measurement of cryptocurrencies is carried out at cost, including all costs associated with their acquisition, as before.
• Subsequent Measurement:
• Fair Value: ASU 2023-08 now allows, but does not require, measuring cryptocurrencies at fair value with changes in value reflected in the income statement. This flexibility can enhance financial reporting transparency. Companies can choose to account for cryptocurrencies at fair value if this aligns with their business model and provides a more accurate representation of financial position.
• Impairment and Recovery: Impairment losses on cryptocurrencies must be recognized if their fair value is below the carrying amount at the reporting date. Recovery of value is now allowed if the fair value subsequently increases, which is a significant change from previous requirements.
• Disclosure: Companies are required to disclose information about the valuation methods for cryptocurrencies, key assumptions, and data sources used for fair value measurement. Additionally, they must disclose information about any impairment losses and recoveries, as well as their impact on the financial statements.

Therefore, considering the introduced amendments, the differences in accounting for crypto assets between IFRS and GAAP have narrowed, though some points are still accounted for differently:

1. The amendments require fair value measurement of crypto assets (a subset of intangible assets), whereas the revaluation model under IFRS is optional for intangible assets.
2. The amendments mandate fair value measurement of crypto assets, while the IFRS revaluation model requires reference to an active market for fair value assessment.
3. The amendments require recognition of all revaluations of crypto assets in net income, whereas IFRS accounting standards require recognition of any gains above the original cost in other comprehensive income without recycling to net income.

Moreover, the amendments in this update require disclosure of information relating to crypto assets not included in IFRS accounting standards. All subsequent topics are considered with these amendments in mind.

4. Key Aspects of Fair Value Measurement

According to IFRS and US GAAP requirements, cryptocurrency should be measured at fair value. There are three levels of fair value measurement (fair value hierarchy):

• Level 1: Market quotes for identical assets or liabilities in active markets. This is the most reliable level as it is based on observable data.
• Level 2: Direct or indirect market data for similar assets or liabilities, or data obtained from models. Used when Level 1 quotes are unavailable.
• Level 3: Unobservable data based on the company’s internal estimates and assumptions. Used when market data is unavailable.

Example of Cryptocurrency Fair Value Measurement:

Fair value measurement of cryptocurrency is usually based on the market price at the reporting date. Here is an example of how this is done and how to reflect value changes in the company’s accounts.

Example based on current IFRS standards and GAAP amendments:

Initial data:

• The company purchased 10 BTC at $30,000 per BTC. Total purchase cost: $300,000.
• At the end of the first reporting period, the BTC price increased to $35,000.
• At the end of the second reporting period, the BTC price fell to $25,000.

Journal Entries:

• Initial Purchase:
• Dr: Cryptocurrency Assets $300,000
• Cr: Cash $300,000

 

• End of First Reporting Period (Value Increase):
• Market value of 10 BTC = $35,000 * 10 = $350,000
• Value increase = $350,000 – $300,000 = $50,000
• Dr: Cryptocurrency Assets $50,000
• Cr: Gain on Asset Revaluation $50,000

 

• End of Second Reporting Period (Value Decrease):
• Market value of 10 BTC = $25,000 * 10 = $250,000
• Value decrease = $250,000 – $350,000 = -$100,000
• Dr: Loss on Asset Revaluation $100,000
• Cr: Cryptocurrency Assets $100,000

5. Using Cryptocurrency for Business Purposes

Since a company can use cryptocurrency in different areas of its activities, such as investments, operational activities (paying suppliers), or paying employee salaries, each should be considered in more detail.

5.1. Using Cryptocurrency for Investment

• Purchase and Storage:

Exchanges: Purchase cryptocurrency through reliable cryptocurrency exchanges (e.g., Coinbase, Binance).

Wallets: Store cryptocurrency in secure cryptocurrency wallets (hardware or software).

• Accounting:

Initial Measurement: Cryptocurrency is measured at fair value on the acquisition date.

Fair Value Determination: Use market quotes from active cryptocurrency exchanges (e.g., Coinbase, Binance) on the acquisition date.

Subsequent Measurement: Revaluation Frequency: Revaluation should be conducted regularly, at least at the end of each reporting period (e.g., quarterly or annually).

Impairment Testing: Conduct impairment testing to determine if the current fair value is below the carrying amount.

 

Example Entries:

• Purchase of Cryptocurrency:
• Dr: Investment in Cryptocurrency
• Cr: Cash
• Impairment:
• Dr: Impairment Loss
• Cr: Investment in Cryptocurrency
• Sale:
• Dr: Cash
• Cr: Investment in Cryptocurrency
• Cr/Dr: Gain/Loss on Sale

 

• Financial Reporting: Include information on valuation methods, fair value changes, and risks associated with cryptocurrency investments in annual and interim financial reports.
• Tax Liabilities and Reporting (USA): Tax liabilities related to cryptocurrency depend on the type of transactions (sale, exchange, use as payment, etc.) and may include:
• Form 8949: For reporting capital gains and losses. Gain or loss is calculated as the difference between acquisition cost and fair value on the transaction date.
• Form 1099: If the company receives cryptocurrency as income.
• Form 10-K and 10-Q: Public companies must disclose information on cryptocurrency assets and changes in their value in annual and quarterly reports, respectively.
• Form 1120: Corporations use Form 1120 to report income and capital gains from cryptocurrency transactions.
• Form 1065: Partnerships use Form 1065 to report income and capital gains from cryptocurrency transactions.
• Form 1099-B: Use Form 1099-B to report sales of cryptocurrency through brokers.

Links to Sources

www.irs.gov/forms-pubs/about-form-1120

www.irs.gov/forms-pubs/about-form-1065

www.irs.gov/forms-pubs/about-form-1099-b

www.irs.gov/instructions/i8949

Documentation:

Keep accurate records of all cryptocurrency transactions for tax reporting, including date, amount, fair value, and counterparties.

Example Record:

Transaction Date | Description | Amount in Cryptocurrency | Fair Value in USD | Counterparty

Compliance and Regulation:

• AML and KYC: Adhere to anti-money laundering (AML) and “know your customer” (KYC) regulations.
• Regulatory Requirements: Stay updated on changes in legislation and regulatory acts regarding cryptocurrencies.

Official Sources:

www.fincen.gov

www.fatf-gafi.org

www.sec.gov

5.2. Using Cryptocurrency for Payments

Acceptance and Use:

• Payment Systems: Connect cryptocurrency payment systems (e.g., BitPay) to accept payments in cryptocurrency.
• Supplier Payments: Use cryptocurrency to pay for goods and services.

Accounting:

• Initial Measurement: Measure cryptocurrency at fair value on the receipt date.
• Subsequent Measurement: Update fair value until usage.
• Expenses: Recognize expenses based on the fair value of cryptocurrency on the transaction date.

Example Entry:

Dr: Expense for Payment (at fair value on transaction date)

Cr: Cryptocurrency Assets (at fair value on transaction date)

5.3. Paying Salaries in Cryptocurrency

Legal Requirements:

• State Laws Compliance: Ensure that paying salaries in cryptocurrency is permitted by your state laws.
• Minimum Wage: Ensure compliance with minimum wage requirements and tax obligations.

Accounting:

• Accruing Salaries:

Dr: Salary Expense

Cr: Salaries Payable

• Paying in Cryptocurrency:

Dr: Salaries Payable

Cr: Cryptocurrency Assets

5.4. Taxation of Cryptocurrency

Tax liabilities related to cryptocurrency can include capital gains taxes, income taxes, and other tax obligations depending on the jurisdiction and types of transactions.

6. Disclosure Requirements in Financial Reporting

Organizations must disclose the following information for each significant cryptocurrency holding:

1. General Requirements:

• Name of the cryptocurrency
• Cost basis
• Fair value
• Quantity held

2. Annual Reporting Periods:

• Method used to determine the cost basis for calculating gains and losses (e.g., first-in, first-out; specific identification; average cost or another method)
• If not presented separately, the line item in which gains and losses are included in the income statement

3. Reconciliation of Operations:

• Additions
• Dispositions
• Gain included in net income for the period, determined based on cryptocurrencies for each cryptocurrency
• Losses included in net income for the period, determined based on cryptocurrencies

4. Statement of Financial Position:

• Cryptocurrencies should be presented separately from other intangible assets in the statement of financial position. The entity may present cryptocurrencies on a more disaggregated basis (e.g., by individual cryptocurrency holders or classes of intangible assets).

5. Income Statement:

• Gains and losses from cryptocurrency revaluation are included in net income and presented separately from changes in the carrying amount of other intangible assets.

Conclusion

Using cryptocurrency in business opens new opportunities but requires careful accounting and regulatory compliance. Understanding key aspects of cryptocurrency accounting and taxation will help effectively integrate it into business processes. Schedule a consultation to learn more about optimizing cryptocurrency use in your business.