What you need to know about having Bitcoin on your balance sheet

Large companies from carmaker Tesla Inc to business intelligence firm MicroStrategy Inc have invested billions of dollars in cash for bitcoin in recent months.

Yet, financial chiefs and accountants still think that the cryptocurrency’s volatility poses a threat to its mainstream acceptance.

On the question of how crypto accounting works, the bookkeeping rules used by U.S. companies make no specific reference to cryptocurrencies.

Under guidance from 2019 issued by the U.S. accounting trade body, companies account for bitcoin under rules for “intangible assets” such as intellectual property.

Companies record the value of bitcoin at the time of purchase in their accounts. If the price rises, they cannot log those gains until they sell. Yet if the value of bitcoin drops, the company must write down the value of their holdings as an impairment charge.

Outside the United States, where companies operate under a separate set of rules, crypto is accounted for differently.

According to the International Financial Reporting Standards Foundation, companies that own digital coins for sale as part of their normal business hold them as inventories at cost price.

Others, such as broker-traders, can hold such inventories at market value.

Other companies hold their cryptocurrencies as intangible assets, like in the United States. Yet they can reverse any writedowns back to original cost if the value of the coin rises again.

In some other cases, companies that record crypto as intangible assets can gauge the value of their crypto holdings at market value.

According to Bitcoin Treasuries, most of the publicly listed companies that hold bitcoin on their balance sheets are specialist cryptocurrency or blockchain firms.

But last month, Tesla became the highest-profile mainstream company to shift some of its coffers to bitcoin from cash, making a $1.5 billion bet on the digital currency.

In a regulatory filing, it said the bitcoin would be accounted for as “indefinite-lived intangible assets”, warning it could face impairment charges if their price falls.

MicroStrategy Inc , led by bitcoin proponent Michael Saylor, holds around 91,000 bitcoin. Its holdings are worth around $4.6 billion.

It analyses bitcoin prices on cryptocurrency exchanges each quarter, with any fall in the value of the asset after their purchase leading to an impairment charge.

Payments firm Square Inc has also converted large chunks of its balance sheet into bitcoin, with boss Jack Dorsey promising to “double down” on its commitment to the cryptocurrency.

Square says it will recognise any decreases in market prices below the original cost as an impairment charge but, in line with accounting standards, will not mark up the value if the price increases.

In its most recent regulatory filings, Square goes into detail about some of the security and custody risks involving bitcoin. It listed losing access as an operational risk, with a hack or data loss potentially harming trust in the company.

It also counted bitcoin volatility and impairment among its legal, regulatory and compliance risks.

Cryptocurrencies are treated as property under federal U.S. tax rules.

Companies can be liable for capital gains tax whenever they sell a cryptocurrency. The amount paid depends on how long they have held the coin and the market value at the time of the transaction.

MicroStrategy warned in a filing to U.S. regulators last month that it could face a tax bill for any gains it made from selling bitcoin and that “such tax liability could be material”.

Other major countries follow similar rules.

In Britain, for example, the type of tax paid for trading digital currencies or accepting payment in crypto depends on who is involved in the business.


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