Thoughts on Crypto Accounting

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In order for teams like ours to do good tax calculations, we need accurate accounting records.  Let us know if you need help with complex crypto accounting with huge data sets.    Many of our clients are crypto traders as opposed to crypto investors.  If you don’t know the difference?  Look at the articles we have written on this from both the US and UK perspectives

Here are some accounting considerations -

Translation to Functional Currency IAS 21

  • As per IAS - 21 the amount of exchange differences are recognized through profit or loss except where a specific IFRS requires a specific treatment and asks to give treatment through specific asset or liability.
  • Reporting currency needs to be determined. All the transactions will be converted to reporting currency on the date of transaction.

Income from Crypto Trading

  • Revenue from trading in Crypto Assets
    • Revenue from trading in crypto token/coin includes sale value for crypto coins & tokens. Also derivative transactions of Crypto Assets. Whenever there are sale transactions of Crypto Assets / derivatives revenue is recognized and accounted for on a gross basis.
    • IFRS 9 Financial Instruments and IFRS 15 revenue recognition are important guidance
  • Revenue from Crypto Derivatives:
    • Derivatives is a financial instrument or other contract within the scope of IFRS 9 with all three of the following characteristics.
      • its value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided in the case of a non‑financial variable that the variable is not specific to a party to the contract (sometimes called the ‘underlying’)
      • it requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors.
      • it is settled at a future date
    • The recognition and derecognition of Financial Asset and Liability is done as per IFRS -9 para 4.1.2A and para 4.2.1. Therefore, standard derivative transactions need to be reported at net value. So, revenue from derivative transactions will be recognized and accounted for on a net basis. The recognition of fair value is also suggested by IFRS - 9.
    • The income from the derivative contracts are recognized based on net results on gross basis whenever gains realized.
  • Rebates earned in the Crypto token balances
    • Most crypto derivatives platforms have what is known as a maker-taker fee structure which actually pays a rebate to “Maker” orders or passive orders that are not immediately filled. This rebate is often 2.5 basis points (or 0.025%) of the value of the trade. The same is accounted as income in the income & expenditure account.
  • Distributions from the Crypto token balances
    • There is distribution of Crypto Assets by the originator of the particular token. They do allot Crypto Assets to holders of the Crypto Assets due the size of the lot or owing a high value transaction, the same is recognised as revenue on the date of receipt of the Crypto Assets in reporting currency. This is like a bonus received by the holder of the Crypto Assets.

Expenses

  • Cost of Crypto Assets
    • Purchase value of the Crypto Assets is recognised as purchases in the statement of profit & loss. Purchase value of the tokens are accounted for on a gross basis.
  • Losses on Derivative Contracts
    • Whenever traders enter into derivatives contracts for crypto, the same is recognised and de-recognised as per IFRS 9 and only net position on gross basis is accounted for losses.
  • Other Operating expenses
    • Expenses are recognised as and when incurred for a reporting period. Such expenses will include Exchange Fee, Lease, payment to employees and others.

Recognition of elements of financial statements

The recognition of elements of the financial statements would be based on IFRS as applicable and accounting policies as details above. The elements of financial statements would cover;

  • Assets
  • Liabilities
  • Equity
  • Revenue
  • Expenses
  • Gains
  • Losses

The probability of future economic Benefit

  • Future economic benefits are not recognised and not accounted for as a conservative accounting principle. Income/benefit if any, will be recognised and accounted for when the same is actually received.

Reliability of measurement

Most reliable value of the Crypto Assets at any given point in time will be considered. The base crypto asset is first valued at the quote currency level of such asset and then from the quote currency to the USD which is the reporting currency. If no direct USD rate quote is unavailable for such a base asset, the second best possible crypto asset will be used to translate the value and than ultimately to the USD.

Recognition of Assets

Current Assets would include;

  • Stock for Crypto Assets / Coins
  • Positions held for Crypto Derivatives contract
  • Cash and Cash equivalents
  • Margin for Derivative contracts
  • Other Current Assets

Non Current Asset would include;

  • Tangible and intangible assets
  • Long Term advances
  • Long Term Investments
  • Deposits for office premises

Crypto Assets held for trading as inventory IFRS 13

For the purpose of valuation of stock, it is valued on the basis of fair valuation as on a reporting date. IAS 2 specifically carves out the valuation of inventory for commodities traders for measurement purpose on cost basis but it allows such traders to value on fair value basis. The IFRS 13 is applicable only to those who are covered and within the ambit of IAS 2.  For traders, IFRS 13 is also not directly applicable.  So we borrow the definition of Fair Value as provided in IFRS 13 and the inventory is valued at fair value on reporting date.

Crypto Derivatives position as on reporting date

In accordance with IFRS 9, the positions held as on a reporting date would be recognised based on fair value basis. Any deviation in the value of positions held would be routed through a statement of profit and loss.

Crypto Assets Trade Margins

  • Margins in the crypto derivatives are derived from the crypto currency inventory balance with the exchange wallet. The same is leveraged by the company for doing larger volume transactions with the exchange. The derivatives are booked on the settlement or on the Mark to Market basis.

 

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