Cryptocurrency Accounting

Crypto Transactions

  • If a business purchases cryptocurrency, it should recognize the asset on its balance sheet at its fair market value on the date of purchase. Practically, this would be a debit to the asset’s account.
    • Assuming the business used cash for the purchase, you credit the cash account for the same amount.
Purchasing Crypto Debit Credit
Bitcoin Asset Account $10,000
Cash Account $10,000
  • Selling cryptocurrency works in the opposite direction:
    • Credit the asset to remove it from your balance sheet at its book value
    • Debit your cash in the amount of of your proceeds.
      • Proceeds could be much higher than the asset’s current book value due to impairment (described in section below) or appreciation, so you could also recognize a credit to a capital gain account reflecting the difference between the book value and proceeds received
Selling Crypto Debit Credit
Bitcoin Asset Account $10,000
Cash Account $10,000

Impairment Concept - Capital Losses Only - No Gains

  • Public companies must account for digital currency as an intangible asset with an indefinite life under GAAP and IFRS.
    • So, companies recognize crypto on the balance sheet at their cost basis.
    • No need to amortize them, since they are an indefinite-lived intangible asset, but
    • A lost must be recognized should the asset ever become impaired.
      • Cryptocurrencies are impared whenever the price dips below the cost basis
      • So, only unrealized losses, not gains, get recorded in the United States

Example: if a business buys \$500K of Bitcoin, and its fair value drops to \$400K, you have to recognize a \$100K loss and reduce the value of the holdings to reflect the decrease in value. If the market value later recovers to \$600K, under the intangible asset accounting rules, the value on the balance sheet must stay at the impaired \$400K value.

Initial Purchase Debit Credit
Bitcoin Asset Account $500,000
Cash $500,000
Impairment following \$100K Capital Loss Debit Credit
Bitcoin Asset Account $100,000
Bitcoin Impairment or Capital Gain/Loss Account (Other Comprehensive Income) $100,000

Cryptocurrency Payments to Vendors

  • If companies use crypto to pay a vendor, they must record the transaction in the same way as if they had sold it:
    • Capital gain for the difference between the expense and the book value of the asset.
Spending \$600K Bitcoin following Appreciation \$400K to $600K Debit Credit
Bitcoin Asset Account $400,000
Bitcoin Capital Gain/Loss Account (Other Comprehensive Income) $200,000
Professional Services Expense $600,000

Crypto Mining

  • Crypto mining should appear in a company’s ledger like any other income-generating activity
    • Credit your Mining Income Account and Debit the Crypto Asset Account at its fair market value
    • Proceeds from mining activities should be recognized as revenue at the time the proceeds are earned
    • If you incur expenses, these would also be accounted for. Credit the cash account, debit an asset account (if purchasing equipment that will be capitalized) or expenses for electricity or supplies
Bitcoin Mining Debit Credit
Bitcoin Asset Account $120
Mining Revenue $120

Financial Statements versus Tax Reporting

Unrealized cryptocurrency losses may require you to make journal entries under the existing rules, particularly when there’s an impairment, where there wouldn’t necessarily be a deduction for unrealized losses on your taxes. Tax basis of accounting avoids the concept of impairment in general.

For these reasons, depending on your situation, it may make sense to maintain an “impairment” account for each crypto that is separate from other “realized gains/losses” and “unrealized gains/losses” accounts.