Accounting for crypto-investments

Cryptocurrency has been popular in the last few years, with many people deciding to invest.

You've probably heard of Bitcoin, or you might have seen the Elon Musk-championed Dogecoin hitting the headlines, but it goes much deeper than that.

Even though there are no accounting standards for cryptocurrency at this stage, it's important to make sure any investments are accounted for correctly – because there may still be tax to pay on them.

Here's how you should consider accounting for cryptocurrencies.

What is cryptocurrency?

Cryptocurrency is an intangible digital asset recorded in a distributed infrastructure called blockchain.

Bought using standard currency, crypto tokens give the owner various rights of use, usually as a means for exchange. Another way crypto can be used is as a representation of interest in ownership of a company.

The crypto tokens represent specific amounts of digital resources which the owner has the rights to control, and whose control can be reassigned to third parties.

In the first quarter of 2021, Tesla added $1.5 billion worth of Bitcoin to its balance sheet and stated it planned to allow Bitcoin as a means of payment. During the transaction, the company said it bought the cryptocurrency for “more flexibility and to further diversify and maximise returns on their cash.”

Accounting for crypto

At the moment, there are no specific guidelines on the accounting for crypto from either the International Financial Reporting Standards (IFRS) or UK Generally Accepted Accounting Principles (GAAP) – the two main pieces of guidance an accountant might follow.

That being said, in 2018 the Institute of Chartered Accountants in England and Wales (ICAEW) published notes on accounting for crypto and suggested treating it under FRS 102 - the principal accounting standard in UK financial reporting. 

In the view of ICAEW, cryptocurrencies couldn't be considered cash because they're not legal tender and their value is subject to risk. The body also ruled out the possibility of treating them as financial instruments as they do not give rise to a financial asset of an entity.

This means the most widely accepted option would be accounting for crypto as intangible assets.

An intangible asset is fined as: 'An identifiable non-monetary asset without physical substance.'

This gives two possible policy choices of accounting for cryptocurrencies as intangible assets.

First is the cost model, where cryptocurrencies would be accounted for and be presented at a historical cost.

Secondly is the revaluation model, which means crypto would be carried at a fair value and any change would be recognised in the revaluation reserve.

UK crypto taxes

Currently there is no specific HMRC legislation for taxing cryptocurrency and similar to the ICAEW, HMRC considers cryptocurrencies as intangible assets as stated in cryptoassets for business document CRYPTO41150.

HMRC says there is a difference between trading and non-trading activity with crypto, affecting its treatment in tax law.

If your activities amount to a trade, income tax will apply to any profits or losses – although HMRC says it expects this to be “unusual”, as few individuals would be buying and selling cryptocurrencies at this frequency, level of organisation and sophistication.

When cryptocurrencies are used in non-trading transactions they are liable to capital gains tax (CGT) for both individuals and businesses. Individuals will need to declare this on a self-assessment tax return. 

Dealing with cryptocurrencies isn't a walk in the park, so it's a good idea to get in touch with HMRC if you're not sure about anything – or an accounting team like us.

Get in touch to talk about cryptocurrency.