Accounting for Digital Assets and Cryptocurrency

Digital assets are becoming increasingly popular, with a growing number of people investing in cryptocurrencies and other digital assets.?

When Accounting Outsourcing is used for digital assets, several considerations need to be taken into account, including how to value the asset, account for losses and gains, and tax the asset. No one approach is universally applicable to all digital assets, and each situation will require a different approach.

What is a digital asset?

A digital asset is an asset that exists only as a digital representation. This could be something like a file on a computer or a token representing ownership of a property.

What is cryptocurrency?

Cryptocurrency is a digital asset that uses cryptography to secure its transactions and control new units. Cryptocurrency is decentralized, not subject to government or financial institution control.

What are the common reporting issues with current accounting standards?

Digital assets and cryptocurrencies present some unique reporting challenges that need to be considered when preparing financial statements. For example, digital assets may not always have a clear underlying value. In this case, it may be necessary to estimate the value of digital assets to prepare financial statements.?

Changes in Value

First, it is difficult to determine the market value of digital assets and cryptocurrency. This is because they are not traditional assets, and their value is not determined by traditional factors such as supply and demand. To solve this, businesses can include the fair market value of the digital assets as a taxable income when they are used to pay as goods or services.?

Reporting as an Intangible Assets

Predominantly, you should report digital assets on a balance sheet as intangible assets. This means that the digital asset's value should be measured based on its potential future economic benefits, not its current market value.?

When digital assets are traded on a secondary market, their market value may change rapidly. To account for this, businesses should track both the digital asset's value and its market capitalization to account for this.

Recorded Losses, not gains

Generally Accepted Accounting Principle (GAAP) considers cryptocurrency as an intangible asset that needs to be recorded at cost, and impairment of the cost needs to be recorded. This means the digital asset value can be reduced on the balance sheet but might not reflect the company's economic value.?

For example, if a business buys $600,000 worth of bitcoin, its value might drop to $300,000; you’ve to recognise a $300,000 loss and reduce your bitcoins hold to reflect the decreased value.?

But, after some time, the value of bitcoin raised to $800,000; you aren’t allowed to reverse the loss or increase its value on the balance sheet. It is an unfavourable treatment for businesses that invest in virtual currency and create misleading financial statement readers.?

How should Businesses record digital assets in their ledger?

Businesses can recognise the digital asset on their balance sheet at the fair market value with the date of purchase. This is done by recording a debit to the assets account.?

Assuming your business purchased the virtual currency using fiat currency, you would credit your account for the same amount. While selling the assets, you do the opposite. Credit the asset to remove it from your balance sheet at its book value, and debit the cash in the number of your proceeds or other consideration received (Proceeds could be much higher than the asset's current book value).

How do you account for digital assets?

Accounting Outsourcing processes for digital assets and cryptocurrencies can be complicated, as they involve multiple methods for tracking value. Generally, digital assets are tracked through their underlying blockchain technology, which allows for a transparent and secure record of ownership. Methods of accounting for digital assets may include tracking the value of cryptocurrencies, maintaining records of transactions, and valuing assets based on their market value.?

Digital assets should be accounted for transparent, secure, and consistent with other financial records. Tracking digital assets through their underlying blockchain technology can help to ensure accuracy and transparency. Methods of accounting for digital assets may include tracking the value of cryptocurrencies, maintaining records of transactions, and valuing assets based on their market value.

How Embee NextGen Can Help

This article briefly highlights the primary accounting considerations and clarifies that crypto transactions have a lot of work.?

Due to the complex work, volume, and rapid growth of crypto transactions, you'll want to account for these transactions of digital assets.?