Digital assets or cryptocurrencies are digital representations of value that are stored on a blockchain. Some examples of the most popular cryptocurrencies are Bitcoin (BTC), Ethereum (ETH), Tether (USDT), and Solana (SOL). - With Bitcoin being the first major digital asset to gain popularity after its release in 2009 (Bankrate).
A growing number of companies have digital assets on their balance sheet, whether for investment purposes or the utility of tokens. Some notable companies that publicly announced their digital asset holdings are Tesla, Microstrategy and Square.
Digital asset accounting is the process of categorizing, tracking, and reporting all cryptocurrency transactions a company may have made. This covers a lot of different actions, like buying or selling cryptocurrency on exchanges, sending or receiving digital assets, paying employees in crypto, or accepting crypto as a form of payment.
Crypto accounting is generally done using specialized software that is designed to track cryptocurrency transactions. This software can be used to generate reports that show how much cryptocurrency a business has, what types of cryptocurrency it has, and where the cryptocurrency came from. That's where Coinbooks comes in - Coinbooks allows you to seamlessly reconcile transactions across multiple blockchains, exchanges, and custodians in just a few minutes.
Cryptocurrency accounting can be a complex and time-consuming process, but it is essential for businesses that accept or make payments in cryptocurrency. Without proper accounting, businesses may be unable to track their cryptocurrency transactions or report them accurately to tax authorities.
Impairment is an accounting term used by businesses to account for assets whose value (or fair market value) has dropped below their acquisition price. It is an important measure of the health of a company's balance sheet and can have a significant impact on a company's financial statements.
When a company records an impairment expense, it is important to note that the expense is not tax deductible. This is because the impairment expense is a non-cash expense, and it does not represent a real loss to the company.
While impairment expenses can have a negative impact on a company's financial statements, they are not necessarily a bad thing. In many cases, impairment expenses are a sign that a company is taking steps to improve its financial health. By writing down the value of its assets, a company is able to improve its balance sheet and make itself more attractive to investors.
Cryptocurrency is considered an indefinitely lived intangible asset and therefore it is recommended to regularly test for impairment.
However, one difficulty with crypto over traditional assets is its volatility. The volatility of cryptocurrencies can pose a rewarding opportunity for investors, but can also make it difficult for businesses to accurately calculate the fair market value of their digital asset holdings.
This is especially important when testing for impairment as your digital asset holdings are considered impaired if their fair market value drops below their carrying value.
As an example, if your company purchases $1000 of Ethereum and the fair market value drops to $500, you would have to account for a $500 loss or impairment expense. Unfortunately, only the unrealized losses are recorded for your business' digital asset holdings - meaning if the fair market value then went up to $1200, the impairment loss still needs to be accounted for.
To calculate the impairment expense of your crypto holdings, it is necessary to record the balance your company owns over the testing period or on a specific testing day. From there, the carrying value and acquisition price for each lot on your balance sheet in this period needs to be calculated.
Calculating the carrying value of tokens can quickly become complicated if your company has a large volume of transactions. It's also important to decide on a tax strategy that controls which acquisitions (and thus cost basis) are associated with each disposal. There are multiple tax strategies, with each taxing authority requiring a different type. Coinbooks supports First-in, first-out (FIFO), Last-in, first-out (LIFO), Average cost basis (ACB), and Highest in, first out (HIFO).
Once the cost basis for all of your assets is found, you can then calculate the crypto impairment expense by looking at the historic price of each crypto asset during the period. From there you can check for any impairment events by looking for specific times where the asset price is below that of the acquisition cost.
Coinbooks makes it easy to calculate impairment expenses instantly with the impairment expense calculator. Simply select a date range, wallet, what assets you'd like to test and a tax strategy, and all impairment events over that period will be shown as well as a total impairment cost.
Besides impairment events, the short-term and long-term loss or gain will also be calculated for the selected period. You can also download the complete list of actions as a CSV which breaks down each acquisition and disposal to give complete clarity into how the impairment was calculated.
If you would like to learn more, please Book a Demo to discover how Coinbooks can save you hours on your business' crypto accounting.