Crypto is by no means a new concept. However, classifying and reporting these assets is another story. With several of the largest financial reporting standards weighing in, it seemed fitting to try and define cryptocurrencies for ourselves.
After all, knowing the asset class our cryptocurrencies fall in might just have an influence on how much we are investing in them. But before we jump the gun, let’s figure out exactly which asset class we should be considering.
From an accounting perspective, there is no one “correct way” to break down all of the cryptographic assets that currently exist. This is because the accounting standards that we know and trust do not have a universal definition for these assets. That said, we can agree that each crypto is a digital version of an asset that is then posted to and viewed on a ledger. This ledger ensures greater security since after we post it all our peers can see it.
Within this definition we can further breakdown these assets to include; bitcoin, altcoins, and tokens. Bitcoin is likely the most well-known. The coin just so happens to be the first digital currency built on the blockchain. Bitcoin is still the most popular form of crypto and has the highest market cap.
Following the widespread use of Bitcoin, you might have heard of altcoins. These coins are essentially any form of cryptocurrency that is not Bitcoin. Altcoins were created to address the limitations of Bitcoin and as a result, have slightly different functionalities. Some even differ in how we mine them. While there are some key differences between these coins, they all are cryptourrencies operating on a blockchain – some on their own, like Bitcoin and Ethereum, and many that are built off other blockchains. But their classification should be the same, intangible.
Finally, there are tokens. Each of these tokens also represents a digital asset, which can then be traded on a specified platform. There are three key types of tokens: asset-backed tokens, utility tokens, and security tokens. Although tokens typically provide additional rights (rights that an alt or bitcoin holder does not have), tokens are also considered intangible assets.
Intangible Assets are what?
When defining intangibles, we are looking at things that are not felt and therefore, have no physical substance. However, this definition has two parts. So for the intangible in question to also be an asset, it would also have to be something that will give us positive economic benefits in the future. If we claim that crypto is an intangible asset, we are stating that this asset has zero physical presence but can somehow still make us money in the future.
Sounds like a stretch, right? Well, maybe not. When considering a business, there are actually many things that the company derives value from that can’t be seen. Think about the know-how to build or maintain your product, a patent or copyright to ensure nobody else can make our product or even just the general concept behind the brand. While we physically can’t see these things, these are all aspects that we can attribute to high profits for a company.
Consider our beloved Apple products. While the company sells us physical items, a lot of their value comes from their ability to research new ideas and in their growth stages having a charismatic leader that inspired creativity. Of course, the company owns offices and factories that may have a sizable financial worth. Even so, much of the company’s value is no doubt comprised of things that we can’t see.
This unique intangible asset class can even be further broken down into definite and indefinite assets. Definite meaning they are only available for a fixed term, and indefinite suggesting the asset is available forever.
According to the IFRS
For a more technical definition, the IFRS (International Financial Reporting Standards) states that intangible assets are non-monetary in nature, not equity and not a cash asset. This viewpoint of crypto holds weight since the IFRS is currently being used in 140 jurisdictions and continues to be recognized in many more. So what they say tends to be the standard that the majority follows.
Furthermore, we would not be able to classify crypto as a financial asset even though it also has no inherent value. This is because we characterize financial assets by the presence of a contractual agreement. An example of this is a deed to a house. Crypto does not meet this requirement as the crypto owner has no contractual agreement to any assets.
The Tangible / Intangible Shift
Remember the popularity of cryptocurrency arose with the intent to solve a problem. This problem is that there was little transparency, security or reliability in the current way we transfer things of value. Despite the use of fiat money (money that is not backed by a commodity but is backed by the government), many don’t really believe it has any worth at all. After all, the government has the ability to control what the currency is worth by issuing more or less of it. The banks also have a say in how money travels from one person to the next.
For these reasons, some have begun to lose faith in these more “tangible” financial assets. To solve this, the belief arose that re-establishing the value of tangibles would have to be done through intangibles mediums. Namely, cryptocurrencies. This is because we currently believe that money has value and so it does. If we all agree that crypto has value, then this currency would be used for a wider range of uses.
While there are still drawbacks to this concept, the ideology itself might be promising enough. The creator of Bitcoin believed it is possible to create digital gold, cutting out banks as middlemen. This is becoming more and more possible as the world population continues to gain internet access.
Okay, okay we get it. Cryptocurrencies are intangibles. But what does that mean for our balance sheets? Due to the implications of mining and the overall intangibility of crypto, figuring out what taxes to pay is far from easy. This is because there is actually very minimal information out there about the taxation of cryptocurrency. As several of the larger accounting firms bring out, this just means that overall principles need to be applied in each circumstance.
Most jurisdictions claim that when reporting the proceeds of crypto mining they should fall under revenue instead of as another form of income. Needless to say, this brings rise to how equipment costs to mine come into play. These factors might include the time spent to mine, the electricity used and the computer that did the mining. While there are some grey areas, transactions including the exchange of fiat money for crypto, paying for goods or services, exchanging different types of crypto or receiving any crypto must be recorded and taxed appropriately.
Taxation is largely dependent on those holding it to keep track. So crypto owners must be diligent in tracking any exchanges or purchases they partake in.
Should I be investing in intangibles?
Despite the non-tangibility of these assets, let’s remember why we like crypto. Trading through banks has resulted in debt and insecurity. This means that in the long term this might not be sustainable. Therefore the classification that crypto is intangible should not be a sole deterrent not to invest; since many still believe in its value.
That said, even though crypto is intangible it is still subject to risks other intangibles might not be. For example, since there’s no physical asset we might believe that theft should not be a concern. Sadly, this is not necessarily the case. Although ironic, cryptocurrencies are still subject to hacking, most notably when being held by 3rd party entities (for example, exchanges) and not in a user’s own cold storage. This means that any trades or investments you make need to be kept in a secure wallet. Additionally, remember to always use safe online practices to avoid any unnecessary risks.