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How a Taxpayer’s Status in Holding Virtual Currencies Impacts the Accounting Treatment of Changes in Asset Value?

Author: Alexander J. Sannella, Ph.D., CPA; Professor of Accounting; Department of Accounting and  Information Systems; Rutgers Business School; Newark, New Jersey1

The statements in this document reflect guidance issued as of February 1, 2020.

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There is currently no codified guidance for accounting for virtual currencies under US GAAP and  IFRS and therefore, practice has varied. In general, it is clear that virtual currencies are assets  but the asset classification remains elusive. Most of the published information indicates that  virtual currencies are not currency, not investments or financial assets and are generally not  classified as inventory. In addition, the purpose of holding the virtual currency will determine  the accounting treatment. Is the virtual currency held by an entity on its own behalf, held by an  investment company or is it held for sale in the ordinary course of business? The answer to this  question will drive the ultimate accounting treatment.  

Virtual Currency Held by an Entity on its own Behalf  

If an entity is holding a virtual currency on its own behalf, current practice classifies that asset  as an indefinite life intangible asset. This means that under US GAAP the asset is held at cost  and written down to market if impaired2. This is the cost-impairment model. The impairment  test begins with assessing qualitative factors and if based on all available evidence it is  determined that it is “more likely than not” that the asset has been impaired, the impairment is  recognized as the difference between the fair value and the asset’s carrying value. If the “more  likely than not” test is met and the asset is determined to have been impaired, then the asset is  written down to market value, with a loss recognized in earnings. Of course, extracting a  proper valuation from inactive markets is difficult. There is no ability to write the asset up again  if it recovers.  

The cost-impairment model is also available under IFRS with the ability to recover any losses  but only up to the original carrying value. That is, an unrealized gain can only be recognized to  recover an unrealized loss. IFRS also permits the use of a revaluation model when accounting  for indefinite life intangible assets. Here the asset can be carried at fair value, if an active  market exist and a gain results, it is deferred in other comprehensive income (on the balance  sheet) until sold. Losses are recognized in profit and loss immediately. If impairment losses are initially recognized, subsequent gains can be recognized in earnings but only to the extent of  the prior loss. Gains in excess of prior losses are recorded in other comprehensive income.  

Virtual Currency Held by Investment Companies  

Under US GAAP, entities defined as investment companies may invest in or hold virtual  currencies as an asset class for purposes of capital appreciation. In this case, the entity would  classify the virtual currency as an investment (typically other investments because virtual  currencies are not securities or financial assets). The investment company can employ fair value  accounting with unrealized gains and losses recognized in earnings. The existence of an active  market is critical for these mark to market procedures to be implemented.  

Virtual Held for Sale in the Ordinary Course of Business  

When virtual assets are held for sale in the ordinary course of business, the asset may be classified as inventory under IFRS and then, the lower of cost or net realizable value rule  applies. The accounting in this case is as the cost-impairment models previously described.  However, IFRS allows commodity broker-trader type entities buying and selling virtual  currencies in the normal course of business to utilize the fair value model: this is the  implementation of fair value accounting with all unrealized gains and losses recognized in profit  and loss. Under US GAAP, virtual currency does not meet the definition of inventory because it  is not tangible in nature. Therefore, only the cost-impairment model applies. 

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1 Written by Alexander J. Sannella, Ph.D., CPA; Professor of Accounting; Department of Accounting and  Information Systems; Rutgers Business School; Newark, New Jersey. Professor Sannella can be contacted at  [email protected] The author is writing on his own behalf and none of the statements should be  attributed to Rutgers Business School. 

2 An asset is considered to be impaired if its carrying value on the balance sheet exceeds its market value, net of  disposal costs. 

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