(Corrects typo in the title)
By Tom Wilson, Anna Irrera and Jessica DiNapoli
LONDON / NEW YORK, March 8 (Reuters) – Large companies, from automaker Tesla Inc to business intelligence company MicroStrategy Inc, have exchanged billions of dollars in cash for bitcoin in recent months.
However, obstacles remain for the rapid emergence of a broader trend for large bitcoin-holding corporations, from cryptocurrency volatility to reputation risk, financial chiefs and accountants told Reuters. Main story:
Here are some of the main questions about cryptocurrency accounting and taxes:
HOW DOES CRYPT ACCOUNTING WORK?
The accounting rules used by U.S. companies make no specific reference to cryptocurrencies like bitcoin.
Under the 2019 guidance issued by the U.S. commercial accounting body, companies account for bitcoin according to the rules for “intangible assets” as intellectual property.
Companies record the value of bitcoin at the time of purchase in their accounts. If the price goes up, they cannot record those gains until they sell. However, if the value of bitcoin falls, the company must record the value of its holdings as a loss charge.
Outside the United States, where companies operate under a separate set of rules, encryption is accounted for differently.
Companies that have digital currencies for sale as part of their normal business keep them as inventories at cost. Others, such as broker-dealers, can keep these stocks at market value, said the International Financial Reporting Standards Foundation, which sets rules for most non-US companies.
Other companies keep their cryptocurrencies as intangible assets, as in the United States. However, they can revert any write-offs back to the original cost if the currency’s value increases again. In some other cases, companies that register cryptography as intangible assets can measure the value of their crypto stakes at market value.
WHAT DOES TESLA AND OTHERS DO?
Most publicly traded companies that keep bitcoin on their balance sheets are companies specializing in cryptocurrency or blockchain, according to Bitcoin Treasuries https://bitcointreasuries.org.
But last month, Tesla became the most profoundly dominant company to transfer part of its money coffers to bitcoin, placing a $ 1.5 billion bet on digital currency.
In a regulatory process, the company said that bitcoin would be counted as “intangible assets of indefinite life”, warning that it could face devaluation charges if its price drops.
MicroStrategy Inc, led by bitcoin proponent Michael Saylor, owns about 91,000 bitcoin. Its stakes are worth about $ 4.6 billion, according to Reuters calculations.
He analyzes bitcoin prices on cryptocurrency exchanges every quarter, with any drop in the asset’s value after its purchase leading to a loss charge, according to a bond deposit last month.
Payment company Square Inc has also converted much of its balance sheet into bitcoin, with chief Jack Dorsey promising to “double” his commitment to the cryptocurrency.
Square says it will recognize any reductions in market prices below the original cost as a devaluation charge, but according to accounting standards, it will not increase the value if the price increases.
In its most recent regulatory files, Square details some of the security and custody risks surrounding bitcoin. He listed the loss of access as an operational risk, with a hack or loss of data potentially damaging confidence in the company.
It also considered bitcoin’s volatility and deterioration among its legal, regulatory and compliance risks.
AND WHAT HAPPENS TO TAX?
Cryptocurrencies are treated as property under United States federal tax rules.
Companies can be held liable for capital gains tax whenever they sell a cryptocurrency. The amount paid depends on how long they hold the currency and the market value at the time of the transaction.
MicroStrategy warned in a filing for U.S. regulators last month that it could face tax collection for any gains it makes from selling bitcoin and that “such tax liability could be significant”.
Other important countries follow similar rules.
In Britain, for example, the type of tax paid to trade digital currencies or accept payment in encryption depends on who is involved in the deal, according to the UK tax agency.
Such activity is likely to incur capital gains tax, corporate tax or other fees, he said.
(Reporting by Tom Wilson and Anna Irrera in London and Jessica DiNapoli in New York; Editing by Pravin Char)