Hot topic: accounting and auditing for cryptocurrencies

July 27, 2021

HMRC recently published its long-awaited ‘Cryptoassets manual’ signalling that the wait-and-see era might be over when it comes to accounting for Bitcoin and other such cryptocurrencies.

When cryptocurrencies such as Bitcoin emerged more than a decade ago, they presented a challenge to global tax authorities – how could this new form of intangible asset be taxed, and investor liability established?

In fact, the challenge seemed so great that many, including the UK tax authority, HMRC, almost seemed to be ignoring the issue. In March 2021, however, it updated the official documentation on this subject.

It refers to cryptoassets, of which cryptocurrencies are a subset. HMRC is clear that it does not regard cryptoassets as currency, or as a form of money, but rather ‘similar in nature to a trade in shares [or] securities’.

The revisions to the manual underline that the important question in deciding on a tax treatment is whether cryptoasset activities amount to a trade. In other words, is investing in and trading cryptoassets a substantial business in its own right?

If an individual is deemed to be trading, HMRC says, receipts and expenses will feed into the calculation of trading profit. Income tax will apply rather than capital gains tax. In the case of companies, cryptoasset profits will be treated as part of trading profits rather than as a chargeable gain.

The changes to the guidance are not yet backed by law in the UK, and there is still no international accounting standard covering cryptoassets.

What does IFRS say about cryptoassets?

The IFRS Interpretations Committee last considered cryptoassets and cryptocurrencies in 2019 when it concluded that:

“IAS 2 Inventories applies to cryptocurrencies when they are held for sale in the ordinary course of business. If IAS 2 is not applicable, an entity applies IAS 38 to holdings of cryptocurrencies.”

IAS 2 defines ‘inventories’ as assets held for sale in the ordinary course of business, in the process of production for sale or as materials or supplies to be consumed in the production or delivery of services. IAS 38 refers to ‘intangible assets’ which it defines as any “identifiable non-monetary asset without physical substance”.

Because cryptoassets and currencies are not treated as legal tender in any territory, and certainly not by the United Nations or other global bodies, they do not meet the strict IFRS definition of cash, as set out in IAS 32:

“currency (cash) is a financial asset because it represents the medium of exchange and is therefore the basis on which all transactions are measured and recognised in financial statements. A deposit of cash with a bank or similar financial institution is a financial asset because it represents the contractual right of the depositor to obtain cash from the institution or to draw a cheque or similar instrument against the balance in favour of a creditor in payment of a financial liability.”

Regardless of references such as the above that might apply to cryptocurrencies, the fact remains that, to date, there is no specific accounting standard covering cryptoassets.

As the status of this new type of asset becomes clearer in coming months and years, and as more tax authorities follow HMRC’s lead in determining local policy, we can surely expect to see more concrete global reporting standards emerge.

Contact us for more information or to talk about how your business accounts for cryptoassets.