The $1tr. Bipartisan Infrastructure Bill, recently signed by US President Joe Biden, includes a tax code change that brings crypto under the tax reporting microscope. What does increased interest on the part of the regulatory authorities mean for corporates holding or considering such assets? TMI asked Antoine Scalia, Founder of specialist accounting software firm Cryptio, to survey the scene.
Tom Alford (TA): What are the current challenges surrounding recording and reporting crypto assets in various jurisdictions under GAAP (generally accepted accounting principles)?
Antoine Scalia (AS): Cryptocurrencies are treated as intangible assets under GAAP and IFRS (international financial reporting standards). As one would expect, businesses are required to report their crypto treasury holdings on their balance sheets and are recorded at their fiat cost-basis upon purchase.
The challenge with GAAP is that it requires businesses to record unrealised losses for intangible assets as ‘impairments’. This means that if the price of the crypto asset value dips during the financial reporting term-end, the business has to report that impairment as an operating loss. This hits their income statement and reduces earnings.
Companies with long-term crypto treasury strategies may have to report losses in their short-term financial reports even if they have no intention of realising the loss. Unrealised gains, on the other hand, are ignored and businesses can’t adjust the value of the asset upward. The gains can be reported only when realised.
This asymmetrical accounting treatment is unfavourable for businesses that hold crypto in their treasury. Businesses would need to communicate their crypto treasury strategy to their investors otherwise they may be misled by the GAAP income statement to believe the company’s operating performance has taken a hit.
TA: What impact does this have on the viability of crypto assets for corporate investors?
AS: An estimated 7.1% of Bitcoin ($84bn) is now held in corporate treasuries. Businesses are increasingly holding crypto assets as part of their treasury, with companies such as MicroStrategy, Tesla, and Square leading the charge.
Financial services providers are adapting their accounting treatments to accommodate crypto treasury strategies and the infrastructure for institutional adoption is being built – custody solutions, payments providers and back-office solutions.
These businesses are recognising the benefits of a crypto-treasury strategy:
- As a transnational inflationary hedge
- For money-market yield opportunities in DeFi (decentralised finance) ecosystems
- As acceptance grows for payments
The nuances of accounting treatments are challenges that can be overcome with the right infrastructure, strategy alignment, and investor communication.
TA: How and why are the rules changing in certain jurisdictions e.g. the US?
AS: In July 2021, the FASB (Financial Accounting Standards Board) issued an invitation to comment during which financial executives were able to call for clear guidance on key accounting issues regarding Bitcoin and crypto assets in general. Alternative cryptocurrency accounting models have been proposed and could also reduce companies’ reliance on performance metrics beyond GAAP.
The Infrastructure Bill also has implications for the crypto industry, however not directly targeting institutional investors holding crypto assets. More so crypto-native businesses such as miners, decentralised exchanges, NFT (non-fungible token) projects and more. In general, this would mean that crypto-native businesses will have greater reporting obligations.
TA: What will the changes mean for international firms that are investing in crypto?
AS: Tax authorities are engaging with the tax treatment of crypto assets. Different authorities across jurisdictions may take different approaches and institutional stakeholders in the industry are keeping a close eye on these developments.
The SEC’s (US Securities and Exchange Commission’s) approval of the first US Bitcoin Futures ETF (exchange-traded fund) marks a monumental shift in regulatory attitudes towards encouraging the institutional and corporate adoption of crypto. It is clear that jurisdiction-based regulation will not decide whether institutions adopt crypto – it will decide where crypto businesses and institutions set up their entities.
Businesses may seek out indirect exposure to crypto assets as the industry and regulatory landscape matures.
TMI Innovation Lab entrant Cryptio offers accounting software enabling firms to track their assets and transactions from crypto wallets, exchanges, DeFi protocols and institutional custodians. Its blockchain data can be transformed into auditable records for accounting, treasury, and tax filings.