Currently, there are no specific accounting standards for cryptocurrency assets, so broader guidelines from International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP) are applied to the accounting treatment of cryptocurrencies.
The balance sheet is one of the three main financial statements required by businesses, the other two being the income statement and the cash flow statement. The income statement and cash flow statement show the economic activities of a business over a specific period, while the balance sheet displays how many assets the business owns, as well as any equity and liabilities.
The balance sheet is also known as the statement of financial position because it provides a complete picture of a company's financial condition. It includes every accounting entry since the company's inception. Therefore, cryptocurrency transactions should be included, especially those that affect the company's financial position.
The balance sheet provides valuable insights into a company's financial health and brings key advantages. Since balance sheets are typically prepared at the end of a specific reporting period, they allow for year-over-year comparisons of business performance. Thus, the balance sheet offers a quantifiable way to track a company's growth trajectory and development progress.
The balance sheet also allows for the calculation of key financial ratios, such as the debt-to-equity ratio, which shows whether a company can repay its debts with its equity. It also contains the information needed to calculate other important ratios, such as the current assets to current liabilities ratio, indicating whether a company can settle its debts within 12 months.
Finally, the balance sheet enables a reasonable assessment of a company's value. This is particularly useful when seeking investors (to prove they will receive substantial returns) or planning to sell the business.
One of the most common questions when preparing a balance sheet is: "Where should cryptocurrencies be placed on the balance sheet?" As mentioned earlier, there are currently no specific guidelines on cryptocurrency bookkeeping from IFRS or GAAP.
However, since cryptocurrencies meet the asset criteria, the core principles of asset accounting apply when preparing a balance sheet that includes cryptocurrency transactions. Here are some practical points:
The recording of cryptocurrency transaction activities should be similar to stock trading activities. If Bitcoin (BTC) or Ethereum (ETH) is purchased, these digital assets can be recorded on the balance sheet at their fair market value on the purchase date.
This will be reflected as a debit to the asset account. Additionally, since cryptocurrencies are purchased with fiat currency, the cash account should also reflect the purchase price of the acquired crypto asset as a credit.
When selling cryptocurrency, the asset account will be credited, while the cash account will be debited for the amount of fiat currency received upon the sale of the cryptocurrency.
If there is a significant difference between the sale amount of the cryptocurrency and the amount paid for it (the original purchase price), the capital gains account should also be credited.
According to GAAP accounting rules for intangible assets, impairment losses cannot be reversed even if the asset price rebounds from previous levels. If a company purchases BTC with a fair value of $500,000 and then its value drops by $100,000, the company must recognize that loss and reduce its cryptocurrency holdings to reflect the decline in value.
Even if the fair value later increases to $600,000, this principle still applies. The loss cannot be reversed or increase the value on the balance sheet. According to GAAP guidelines, the impaired value (in this scenario) will remain at $400,000.
Companies engaged in cryptocurrency mining must record cryptocurrency profits on their balance sheets, just like other revenue-generating activities. This means that their mining income account will be credited, while the newly generated digital assets must be recorded as a debit at their fair market value.
Expenses incurred during the mining operation must also be recorded. For example, if cash is used to pay mining expenses, the cash account must be credited. Correspondingly, the purchase of mining equipment that needs to be capitalized and amortized will be recorded as a debit to the asset account, or other items such as supplies and utility costs will be recorded as expenses.
When a company uses cryptocurrency to pay suppliers or vendors, this constitutes an asset disposal, and should be recorded in the same manner as the sale of cryptocurrency (i.e., crediting the asset account). At this point, the capital gain resulting from the difference between the expense and the book value of the asset must be recognized.
For example, suppose a company holds 100 BTC with an initial value of $300,000, and then the fair value of BTC rises to $400,000. If the company chooses to pay the auditing firm with BTC valued at $400,000 instead of cash, that amount should be debited to the professional services expense account, while the BTC asset account should be credited $300,000, and the remaining $100,000 difference should be credited to the capital gains account.
Tax compliance is an indispensable part of cryptocurrency accounting. According to current asset handling standards, cryptocurrencies are treated as capital disposals when sold.
When the profit from a capital disposal exceeds the purchase price of the cryptocurrency, capital gains tax will be incurred. Conversely, if the disposal proceeds are less than the purchase price, a capital loss will occur. These losses can be used to offset capital gains from other assets or carried forward to the next fiscal year, thereby reducing tax liabilities.
Individuals receiving compensation in the form of cryptocurrencies like BTC or ETH will bear corresponding income tax responsibilities. The market value of the cryptocurrency at the time of the transaction should be recorded as transaction profit. Companies must also pay corporate tax on such profits.
Although tax and accounting are inherently closely related, the rules applicable to both are not always completely consistent in all cases. For example, unrealized cryptocurrency losses must be recorded in the journal according to IFRS and GAAP rules, especially when an asset impairment event occurs, these losses are typically not deductible for tax purposes.
The cryptocurrency tax system is complex, and financial reporting for accounting purposes can be even more difficult to understand in certain cases. To avoid confusion, cryptocurrency transaction records are typically divided into two main categories based on their tax nature: transactions that generate income tax and transactions that generate capital gains tax.
According to GAAP and IFRS standards, the following events will require a company to pay income tax on the fair market value of the asset:
For this reason, all of the above activities should be recorded as total income for the year. These will be taxed as ordinary business income, but all ordinary and necessary expenses incurred from these activities will be deductible.
As for events that trigger capital gains or losses, all transactions classified as capital disposals of cryptocurrencies that generate gains (and differ from their cost basis) are considered taxable transactions:
Non-taxable cryptocurrency events refer to transactions that do not increase the company's tax burden. These include:
The foundation of prudent financial management is accurate accounting of profits and losses. This plays a key role in ensuring the transparency and credibility of financial reporting. For stakeholders such as investors, creditors, and regulators, it is an indispensable factor in assessing an organization's performance and financial health.
Therefore, rigorous accounting not only ensures legal compliance but also enables individuals, businesses, and organizations to make effective strategic decisions, leading to sustainable development and long-term success.
Related: Cryptocurrency Trend Discovery: How to Identify Winning Projects Before the Masses
Original text: “How to Handle Gains and Losses from Cryptocurrency Trading on the Balance Sheet”
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