Companies Must Be Cautious When Accounting For Cryptocurrency
Businesses that invest in cryptocurrencies and sell assets such as nonfungible tokens should be mindful of the accounting and tax issues that come with them, or they risk being fined by regulators. More businesses are considering integrating cryptocurrency into their corporate activities, thanks to companies like MicroStrategy spending billions of dollars in cryptocurrencies. Cryptocurrency offers companies both prospects and obstacles, just like in any technological frontier, there are unforeseen risks as well as tempting rewards.
Corporates Using Crypto, a recent paper from Deloitte, provides an outline of the kinds of questions and observations companies can address when they decide when and how to use cryptocurrency, including topics relating to corporate treasury, planning, logistics, risk, policy, accounting, and tax. Customers are less likely to pay in cryptocurrencies like Bitcoin and Dogecoin when their popularity rises. Other types of crypto, such as stablecoins, attempt to peg their value to an external reference, such as a national currency, and therefore are less volatile.
When an individual invests in a certain asset class, such as Bitcoin, the expectation is that it will continue to appreciate in value. It makes no sense for a consumer to invest in an asset that would rise in value. Simply put, that means you’ll pay more for anything than you would otherwise.
So, whilst that dynamic exists, with the rising value of cryptocurrencies, more and more consumers would choose to pay in a stablecoin. They come in a variety of shapes and sizes. When it comes to how businesses can accommodate payments, stablecoins are becoming an increasingly valuable part of the basket of currencies. Companies often continue to participate in the crypto movement to demonstrate to consumers that they are not lagging behind their rivals. “They might opt to accept it as a means of payment from their customers only because it sounds cool,” said Rob Massey, Deloitte Tax’s global tax and blockchain assets head.
They deserve to be seen as forward-thinking. They quickly discover that there are a lot of consumers who will like to pay in stablecoin or cryptocurrency. Any vendors may choose to be paid in crypto or a stablecoin. Then the journey of how trade is transforming continues. Companies interested in entering the crypto community should ensure that they have the required tax and accounting processes in place. People expect that smart contracts and programmable money can be used to elevate trade in the not-too-distant future. Why not begin experimenting with crypto as a payment system right now, just to be prepared?
The main reason for thinking about the preparation of creating crypto-friendly customer service is due to the increased popularity of the entire industry, especially since last year. If before that nobody knew how they could use the virtual currency after buying it, now the picture is actually wider. We can boldly say that it is becoming implemented in various different sectors starting from the fast-food industry such as Burger Kings or Starbucks, continued with the entertainment sector where you can actually use BTC to play the live roulette on online BTC casinos and ended up with the opportunity to even already buy Tesla. One of the contributing factors for it might be the fact that many different countries are actually becoming more crypto-friendly and try to impose a policy that would help to improve the industry due to its financial benefits. It does not apply to every country and in some cases, the industry is even marginalized.
From a tax standpoint, cryptocurrency may be difficult. When you buy something that isn’t fiat, you’re noticing a gain or loss from a tax standpoint every time you use it, so the benefit it has when you use it is likely to vary from your base, triggering a gain or loss. That adds a layer of difficulty. Our system isn’t used to dealing with barter. That’s kind of how tax works when you’re using some kind of land that’s changing in value for property and services. You’re causing a benefit or loss every time you use it. Companies will choose to use a legitimate broker to handle payments for them in some cases. The first decision they would make is if they want to take crypto and keep it themselves, or if they want to use the services of an agent that would simply cash out the crypto for them, charge a fee, and reimburse them in fiat. Both are viable alternatives, and service providers are available to meet those needs. Obviously, if the company is using a third party, you can do your due diligence to ensure that this company has the safeguards in place to do so properly because you are ceding some consumer relationship risk to this third party, as well as some regulatory risk.
If you accept cryptocurrency as payment, you owe it to the Office of Foreign Access Control to ensure that you’re not receiving funds from countries that are approved or limited. And if you’re not a financial entity, if you consider crypto as a form of payment, you do bear some responsibility. Accepting crypto transfers must be done with caution to avoid being duped into a money-laundering scheme. It’s a risk that all businesses should be worried about, but businesses with an inflow and outflow pose a much higher risk of money laundering.
Accountants must be aware of price swings in the crypto economy, which may vary from how the normal currency market operates. There are times that you’re investing with stuff, such as a digital commodity or a cryptocurrency that is fluctuating in value. What would that mean? It provides the possibility of a derivative, which is different from others. Christie’s auctioned a piece of art by the artist Beeple in the shape of a nonfungible coin, or NFT, for $69 million in March, raising the consciousness of the convergence of cryptocurrency and actual currency. Traditional crypto is one thing, and it’s still going strong with NFTs, which are becoming increasingly common.
Any of that is from people who say things like, “If I had a preference, I’d rather be paid in crypto than in fiat.” You’ve got online companies that are increasingly considering how they can create their own tokens that are part of their own ecosystem, perhaps with a rewards aspect.
SEC and FASB standard-setting
The Securities and Exchange Commission is still holding a careful watch on the cryptocurrency industry, while public corporations haven’t become too involved quite yet. It’s still early days, and we haven’t seen much evidence of widespread use of digital assets. There have been a few recent one-off significant transactions, but we haven’t seen much beyond that. Because not all digital assets are the same, there are some serious scoping issues here. People frequently ask this question as if we’re only talking about Bitcoin, but the world of digital assets is vast and evolving. If we are to consider a standard-setting solution, we must first consider the scope of the problem.
At the same conference, Richard Jones, the chairman of the Financial Accounting Standards Board, stated that the FASB had decided not to add a project on digital assets to its agenda this year. He explained, “When we looked at it, there wasn’t a lot of diversity in practice in the accounting for similar items.”
He also mentioned that an AICPA paper was available, which does a fantastic job of explaining the intangible asset model and how it would be applied to digital assets that qualify as intangibles. Finally, when they consider the agenda, they consider not only what would be a good accounting question to answer, but also prevalence, which they haven’t seen to date.
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