Understanding the New Changes in U.S. Cryptocurrency Accounting Rules: Wrapped Tokens Excluded from Final Rule
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Understanding the New Changes in U.S. Cryptocurrency Accounting Rules: Wrapped Tokens Excluded from Final Rule
The narrower the scope of the new regulations, the easier and faster they can be implemented.
Navigating Web3 tides with focused insightsAuthor: TaxDAO
We believe the new accounting rules for crypto assets will bring the following impacts:
From an accounting perspective, requiring cryptocurrencies to be measured at fair value means more uniformity and transparency in accounting treatment. Although the new standard may lead to greater earnings volatility for companies with significant cryptocurrency investments, for most companies holding digital assets for capital appreciation, disclosing information under fair value measurement—and requiring detailed disclosures about held crypto assets in financial statement footnotes—can better reflect the impact of these assets on holders' financial positions, reveal the economic substance of digital assets, and support better decision-making by corporate managers and investors.
From a tax perspective, since capital gains taxes are levied only on realized gains, what affects realized gains is the method used to determine asset cost upon disposal (transfer or sale), such as FIFO (first-in, first-out) or moving weighted average cost. Therefore, whether historical cost or fair value is used for subsequent measurement during the holding period does not affect realized capital gains or the amount of capital gains tax owed. However, when fair value measurement is adopted, accounting systems must accurately distinguish between realized and unrealized gains within each reporting period to ensure accurate tax reporting.
Regarding accounting software, compared to traditional financial products like bonds and stocks, cryptocurrencies are highly diverse, experience frequent and significant price fluctuations, and involve complex transaction scenarios. Thus, regardless of whether cost-based or fair value measurement is used, they pose major challenges for accounting software. Compared to the cost method, fair value measurement requires periodic assessment of changes in the value of held crypto assets and recognition of corresponding fair value gains or losses. This necessitates that accounting software can track, account for, and measure value changes across different categories of crypto assets throughout the entire accounting period, enabling accurate calculation of valuation changes and realization of capital gains.
TaxDAO is currently developing Intax, a comprehensive tax and accounting software designed to fully meet the above accounting and tax filing requirements while offering additional functionalities. It aims to make financial accounting easier for enterprises holding or investing in cryptocurrencies, ensuring timelier and more accurate accounting data and smoother tax compliance. The tool is intended to help large corporations overcome fears of balance sheet exposure to crypto assets due to technical complexities in accounting, thus facilitating their entry into the cryptocurrency market.
Of course, the new rules do not cover all types of crypto assets—for example, NFTs (non-fungible tokens) and wrapped tokens are excluded. As FASB member Susan Cosper noted, narrowing the scope makes it easier to implement the rules quickly.
The U.S. approach to cryptocurrency-related tax and accounting policies has long served as a reference for other countries and regions. The introduction of these new rules could gradually eliminate current global inconsistencies and ambiguities in cryptocurrency accounting standards.
Below is the full Bloomberg article:
Long-Awaited Bitcoin Accounting Rules to Capture Ups and Downs (2)
Author: Nicola M. White
Originally published: September 6, 2023
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Fair value accounting rules effective from 2025
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Wrapped tokens excluded from final rules
U.S. accounting standard-setters voted unanimously Wednesday to provide long-awaited accounting rules for cryptocurrency firms and other companies holding large amounts of digital currencies to measure their holdings of bitcoin, ether, and other cryptocurrencies.
Under the new rules expected to be issued by year-end, companies holding or investing in cryptocurrencies will be required to report their assets at fair value—including recoveries after price declines—a measurement approach designed to capture the latest asset values. For months, companies and accountants have told the Financial Accounting Standards Board (FASB) that although the new standard may cause earnings volatility for firms with heavy crypto investments, the ability to record recoveries would represent an improvement over current practice.
"It's not common that we're able to both reduce systemic costs and improve the decision usefulness of information," said FASB member Christine Botosan. "But this makes achieving both very straightforward."
FASB agreed the rules would take effect as early as 2025, though companies could choose to adopt them earlier.
Gaps in the Rulebook
The U.S. accounting rulebook currently contains no specific guidance on how companies such as software maker MicroStrategy, automaker Tesla, or crypto exchange Coinbase should recognize and measure their digital currency holdings.
Currently, these companies default to guidance from the American Institute of Certified Public Accountants (AICPA), which classifies most cryptocurrencies as intangible assets. That category includes items such as trademarks, copyrights, and brands—all of which differ from cryptocurrencies in that they rarely trade. This means companies record their crypto holdings at original purchase cost and assess them quarterly for impairment or value decline. If bitcoin’s price drops temporarily during a period, it is considered impaired. But if the market recovers, these companies cannot upwardly adjust the value.
MicroStrategy, the publicly traded company with the largest crypto holdings, typically sees its earnings affected by this accounting method.
Andrew Kang, MicroStrategy’s chief financial officer, wrote to FASB in May responding to the board’s initial proposal, saying that reporting crypto at fair value “will enable us to provide investors with a more relevant view of our financial condition and the economic value of our held bitcoins, which in turn will assist investors in making informed investment and capital allocation decisions.”
All companies—public and private—must comply with the accounting rules for fiscal years beginning after December 15, 2024, including transition periods within those years. This means calendar-year-end companies will adopt the rules in 2025. Once FASB formally issues the rules later this year, companies will be permitted to adopt them early.
Companies are already required to list intangible assets as a line item on the balance sheet. Under the new rules, businesses must separately disclose their crypto assets so investors and other financial statement users can clearly see how much the company has invested in cryptocurrencies.
In addition, companies will disclose in footnotes for each reporting period the nature and extent of their crypto holdings and any restrictions on them. Annually, companies must reconcile or disclose changes in beginning and ending balances of crypto assets by category. On Wednesday, FASB agreed that reconciliation activities need not include crypto assets received as payment and immediately converted into cash.
Furthermore, FASB agreed that because cryptocurrencies will be measured at fair value, companies must comply with disclosure requirements under applicable accounting rule ASC 820, allowing financial statement users to understand how companies arrive at their measurements.
A Long Journey
Since 2017, FASB had rejected three separate requests to establish rules for cryptocurrencies, citing insufficient substantive use of bitcoin by companies. But the board changed course after major firms like Tesla and MicroStrategy began investing in blockchain-based assets.
The board’s scope is narrow, covering only assets created via or residing on distributed ledgers using blockchain technology and secured through cryptography. Under current U.S. accounting definitions, crypto assets must be classified as intangible and fungible—meaning they are interchangeable with others of the same kind.
Non-fungible tokens (NFTs)—unique digital tokens representing anything from video clips to digital sports trading cards—are not covered by the rules. Stablecoins and wrapped tokens (digital tokens that allow a cryptocurrency from one blockchain to operate on another) are also excluded.
Several groups, including the Big Four accounting firms, pressured FASB to include wrapped tokens, arguing their holding purposes and trading prices closely mirror those of underlying crypto assets.
On Wednesday, most board members said they needed more market information before expanding the scope and declined calls to include wrapped tokens.
"Deliberately narrowing the scope has really allowed us to get this information into investors’ hands more quickly," said FASB member Susan Cosper.
FASB said it will continue monitoring the cryptocurrency market and take further action as necessary.
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