Whether you believe that digital assets like Bitcoin, Dogecoin, and Ethereum represent the greatest investment opportunity in decades or the greatest scam in history, one thing is certain: cryptocurrency is going mainstream. Not only is it ubiquitous in investor portfolios – from some of the largest institutional funds to the humblest online brokerage accounts – it has become a staple on the balance sheets of multinational corporations.
And that poses serious challenges for corporate tax departments, which now have to incorporate wild valuation fluctuations into their forecasts and impairment calculations. Although popularly referred to as “currency,” current accounting rules require companies to treat cryptocurrency holdings as an intangible asset. That means they have to write down the value of the asset when the price goes down, but cannot write up the value when the price goes up.
PARIS, FRANCE – The Coinbase Cryptocurrency Exchange Logo (C) can be seen on the screen of an iPhone … [+]
We all flaunted this volatility very publicly over the summer when Tesla reported that the value of its Bitcoin holdings fell more than $ 1 billion in a single quarter, from $ 2.5 billion in late March $ 1.5 billion at the end of July. That’s a pretty wild quarterly swing that has absolutely nothing to do with EV launches, new model launches, production delays, or any other aspect of Tesla’s core TSLA business that is difficult for both tax teams and investors to predict.
The challenge is not just for Tesla. In total, companies currently own around 1.6 million Bitcoin, which corresponds to around 8% of the total supply of cryptocurrency. Bitcoin’s largest single investor, data analytics firm MicroStrategy MSTR, now owns $ 5.4 billion in Bitcoin holdings, representing 75% of its total market cap.
The growing prominence of crypto on corporate balance sheets is not being lost on regulators and standardization bodies and is likely to force a day of reckoning. The Securities Exchange Commission has begun considering a new regulation to introduce reporting requirements to curb fraud. The Basel Committee on Banking Supervision, which sets global standards for banking regulation, has suggested that banks trading crypto assets should hold significant buffers to cover potential losses. And within the framework of the latest Infrastructure Act, the federal supervisory authorities have struggled to formulate clear reporting obligations.
Noticeably absent from the conversation was the Financial Accounting Standards Board (FASB), which sets accounting and accounting standards for public and private companies that follow generally accepted accounting principles (GAAP). In June, the FASB released an invitation to comment on its agenda for the year and identified digital assets as a core area in which it is looking for guidance.
Until these standards are developed, however, corporate tax departments must maintain a cumbersome asset that is subject to quarterly revaluations that disproportionately show the downside risk. Under current accounting rules for the treatment of intangible assets, corporate tax departments are required to conduct an impairment test annually, or when the price drops below the company’s book value. If the value falls – as is often the case in the volatile world of cryptocurrency – and the company charges a fee, the fair value of the asset is reset. However, if the price rises, the company cannot make a profit. That can only happen if the company sells the asset.
With that in mind, keeping large amounts of cryptocurrency on the company’s balance sheet under current accounting rules is a bit like storing gunpowder in a match factory. Sure, there is great upside potential, but if things go sideways the explosion could be spectacular.
At the close of trading on August 30, one bitcoin was worth $ 47,464.60. A year ago? $ 11,655. Of course, there are a number of market factors that have favored digital coin lately and contributed to the growth of cryptocurrency, but will that always be the case? One only has to look back to the end of 2018 to see Bitcoin tumble from its original high in January 2018 of over $ 17,000 per coin to just over $ 3,000 per coin: a drop of 81% in just 11 months.
That’s a lot of volatility on a corporate balance sheet, much more than one would expect in such a risk-averse environment. As multinational corporations move forward with this significant risk in their respective ledgers, it will be fascinating to see how they react to the regulatory hurdles and market volatility that is sure to follow. We’re in the first chapter of the crypto saga, and we’re not even past the prologue when it comes to the business impact. But unless things change soon – either from an accounting law perspective or from a cryptocurrency volatility perspective – corporate tax departments and investors alike need to become familiar with the oversized risk.
Forbes Crypto & Tax Webcast: Get in-depth coverage and insights into navigating the crypto tax landscape on September 21 at 2:30 p.m. (EST). Register here.