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Companies and cryptocurrencies: accounting and tax aspects
Like individuals, some companies are now acquiring cryptocurrencies as an investment, as a means of payment for their customers, or for other reasons. We briefly discuss some useful aspects from an accounting and tax perspective in our article below. Indeed, RSM has been able to develop subject-specific knowledge on cryptocurrencies over the last few months in order to position itself as a well-known and recognized provider in the sector of digital assets. For practical reasons, we regularly use the term "Bitcoin", however the various aspects covered apply to all digital assets (cryptocurrencies), Bitcoins or otherwise.
1. Consequences of the integration of Bitcoin into its financial statements and rules applicable to this integration
The integration of Bitcoin, like other cryptocurrencies, into one’s accounting involves :
New legal and regulatory issues to consider
Subject to recent developments, the legal and regulatory nature of Bitcoin in Switzerland is as follows :
Bitcoin is not a legal tender, as only the Swiss National Bank is authorized to issue legal tender.
Bitcoin is not considered as a foreign currency because official foreign currencies are issued by a centralized agency such as a central bank and qualified in their country of origin as legal tender.
Bitcoin is not a good or service.
Bitcoin is qualified as an object, within the meaning of art. 641 CC, as a unit of digital information ; therefore, holders of Bitcoin have a right related to this thing which is appreciable in money (even though Bitcoin has no physical substance).
Bitcoin currency units do not constitute securities, assets, or any other right of claim.
Presentation and accounting treatment according to their use :
Securities (current and fixed assets)
Bitcoin, like gold and other precious metals, has a market value without being directly considered as a legal tender or a receivable. In addition, the securities account includes certain receivable and equity interests that do not have the character of paper securities. Thus, gold and other precious metals are usually presented under this section. Therefore, the definition of securities is defined wide enough to admit assets that are comparable to Bitcoin in various respects.
A classification of bitcoins as a separate position "securities" within current assets or as part of listed assets held on a short-term basis is therefore appropriate when there is an intention to hold them on a short-term basis and when Bitcoin trading is not part of the ordinary operating activity of the company.
A classification of bitcoins as securities within its financial assets is appropriate when there is a long-term holding intention.
In the case of such a classification, bitcoins should be valued in two different ways:
At the lowest acquisition cost/value.
At market price or another observable current price is also possible. In this case, the valuation can be based, for example, on the valuation published by the Federal Tax Administration (FTA) since 31.12.2015, and used as a reference value for wealth tax considering an average value of different Bitcoin providers. However, it is also allowed to make its own assessment of the current price based on actual transaction prices on the trading platforms relevant for the company at the balance sheet date. Transaction costs should normally be booked as expenses in the same way as brokerage fees and bank charges. However, they may also be capitalized as part of acquisition costs.
Inventory :
If the trading of bitcoins represents a substantial part of the company's ordinary operating activity, a classification as stocks may be appropriate.
In this case, bitcoins can be valued in two different ways (right of option) :
On the basis of the acquisition cost or current price (market value) if this is lower (art. 960c, para. 1, CO). Acquisition costs can be determined according to a usual procedure, such as FIFO method (first in – first out), the weighted average cost method, etc… ;
On the basis of the current observable price, provided that this valuation method is applied to all bitcoins accounted as inventory.
Intangible assets :
Intangible assets in fixed assets section include identifiable assets that are non-monetary and have no physical substance. Bitcoins intended to be held for the long term meet these criteria. However, by their nature, bitcoins should be considered much more like securities.
Bitcoins that are booked in the balance sheet as intangible assets can be valued in two different ways (right of option) :
Based on the acquisition cost/lower value principle. Since Bitcoin is not subject to any loss of value due to its use and the time factor, no amortization is required. On the other hand, "losses in value due to other factors" must be recognized through value adjustments (Art. 960a, para. 3, CO). Such value adjustments must be made as soon as the current price is lower than the acquisition cost or the previous book value ;
Based on an observable current price.
For all bitcoins that are valued at an observable current price, the creation of a fluctuation reserve is possible under Art. 960b para. 2 CO and must be examined.
In debts :
The Bitcoin payment system only allows for credit accounts. Therefore, "debts in bitcoins" are only possible when it has been agreed with a third party that a debt is to be settled by payment in Bitcoin instead of a traditional currency. In this case, the balance sheet entry depends on the nature of the debt concerned. Bitcoins and their value in traditional currency are only relevant for valuation purposes.
The valuation is carried out on the same basis as for foreign currency debts. In particular, the principle of prudence must be observed: any unrealized exchange rate losses should be recognized as expenses; unrealized exchange rate gains, on the other hand, should not be recognized in the income statement.
Adaptation of the reporting system and process in order to deal with its volatility
Tracking capital gains and losses
Depending on the volume involved and the valuation option chosen, companies need to adapt their reporting system and processes to meet both their accounting and tax reporting needs.
Crypto accounting automation
More and more companies that have fully integrated Bitcoin into their activities are opting to automate their crypto accounting, either through the use of software specialized in crypto or by integrating a « crypto » module into their so-called « classic » accounting software. Through this automation, transaction history is easily retrievable, capital gains/losses easily calculated, balance sheet accounts easily revalued, etc…
An adaptation of the financial statements’ structure
In case of large amounts of bitcoins, these must be presented separately.
The volatility of Bitcoin is such that the book value taken into account at the reference date are so relativized that only separate presentation can establish the required clarity of the balance sheet.
If assets are valued at an observable current price, these valuations must be disclosed in the notes. The total value of assets in bitcoins is to be considered as part of the totals to be disclosed in the notes for the items "securities" or "other assets".
If a fluctuation reserve within the meaning of Art. 960b para. 2 CO has been set up, it must be presented separately in the balance sheet or in the notes.
If, after the balance sheet date but before the approval of the annual accounts, significant value adjustments are required in the new financial year, disclosure of the financial consequences must be examined. The valuation on the balance sheet date must comply with the principle of the criterion date.
2. Tax implications
The FTA treats Bitcoin for tax purposes according to its accounting treatment.
This means that the purchase as well as the simple holding of payment tokens, purchased via platforms, should not generate any income tax or withholding tax. The tax consequences will ultimately follow the way in which the token (in particular, Bitcoin) is accounted. Thus, the accounting valuation basis for this type of asset will determine when and if income should be recognized in the company's income statement (the so-called principle of determinance).
In other words, if the cost method is used, only revenue will be recognized when the Bitcoin is actually resold (assuming that the price of the Bitcoin has increased since its acquisition). If the market price method (observable current price) is used, then the capital gain will be gradually recognized in the company's income statement. Therefore, the capital gain will be taxed at the ordinary effective tax rate on the profit by the canton of the headquarters. It is interesting to note that in the first solution (valuation at cost), the capital gain and thus the related taxation only occurs when the Bitcoin is actually sold, whereas the capital gain can be smoothed over time in the case of the market price method.
The choice of accounting and valuation method for digital assets is important, especially for the company's cash-flow. Indeed, in case of a strong increase of the asset during a year, the tax burden could be significant even if a sale (or cash inflow) has not taken place, in case the market price method would have been chosen.
3. Interest of companies in integrating Bitcoin into their accounting and reasons for doing so
We are observing a growing curiosity of companies for Bitcoin and their interest in being part of this « revolution ». This interest is generally driven either by a desire to respond to their customers' growing demand for payment in cryptocurrency, by a « conviction », a desire for transparency through the use of a decentralized system, or by the pure search for profit and the best investment.
Globally, companies are integrating bitcoins in their accounting :
As a means of payment
More and more consumers are demanding the possibility of payment in cryptocurrency especially among young people which is pushing the most innovative companies to integrate Bitcoin as a payment method. This trend is actually more global and was confirmed by the study conducted by PYMNTS and BitPay in the United States which revealed that 28% of consumers consider crypto as a payment option. This number becomes considerably higher if you exclude baby boomers and seniors - nearly 39% - and without Gen Xers, it rises to 42%.
as an investment
Due to the success of Bitcoin, some companies are willing to invest in Bitcoin. Indeed, attracted by the gains made by some companies and individuals as a result of their investment in Bitcoin over the past several years, some companies are taking the risk of getting into it. This trend affects three categories of companies: personal or family holdings, management companies and family offices that buy cryptos on behalf of their clients, and SMEs that want to diversify.
As a means of equity financing
Some companies looking for financing find themselves integrating Bitcoin as a means of equity financing. Bitcoin is an asset that can be contributed as part of a qualified foundation of a capital company.
As an integral part of their operational activity
Considering the opportunities offered by Bitcoin, more and more companies are turning to the "business" that Bitcoin offers by making it a central part of their operational activity. Thus, more and more trading, brokerage, mining, etc. companies are emerging to respond to the enormous opportunities offered by cryptocurrencies.
