Exploring Cryptocurrency: A Guide to Understanding the Basics and Accounting
What is Cryptocurrency?
Cryptocurrency is a type of digital money that exists only online. It is a digital asset used to buy, sell, or trade things, just like regular money. What makes it special is that ownership and transaction records are stored in a secure online database using strong cryptography. This protects the system, prevents fraud, and controls how new coins are created or transferred. Cryptocurrencies are decentralized, which means they are not controlled by any bank or government. Instead, they run on a technology called blockchain — a special type of computer system that keeps everything transparent and secure. The most famous and widely used cryptocurrency is Bitcoin.
Key Features:
- Digital:
Cryptocurrency is only online – no coins or notes. You use it through apps or websites, like a digital wallet. - Decentralized:
Not controlled by any government or central authority. - Secured by Cryptography:
All transactions are recorded in a digital book called the blockchain. It’s almost impossible to cheat or hack it. - Blockchain-Based:
It means this digital money uses blockchain technology to store, verify, and protect all its transaction history. Everyone using the cryptocurrency has a copy of this notebook, so no one can cheat. If someone tries to change a transaction, others will notice and reject it.
Some popular cryptocurrencies include:
- Bitcoin (BTC):
Bitcoin is the first and most widely recognized cryptocurrency. Bitcoin was introduced to the public in 2008 by an anonymous developer or group of developers using the name Satoshi Nakamoto. Bitcoin is widely used as a store of value and is the most traded and recognized crypto globally. - Ethereum (ETH):
Is a cryptocurrency like Bitcoin, but it also lets people build apps and programs that run on the blockchain. Ethereum lets developers create smart contracts, programs that run automatically when certain conditions are met. No need for middlemen like lawyers or agents.
In easy words:
Bitcoin = Digital Money
Ethereum = Digital Money + Programmable Apps - Solana (SOL):
A cryptocurrency and blockchain platform known for being very fast and low-cost. It helps people send money, create smart contracts, and build apps just like Ethereum but much faster and cheaper.
Solana is like a super-fast expressway, quick and smooth, even when busy. - USD Tether (USDT):
USDT is a stablecoin that mirrors the value of the U.S. dollar, maintaining a 1:1 peg. Unlike typical cryptocurrencies known for their volatility, USDT is designed to offer price stability, serving as a digital equivalent of traditional fiat currency.
How It Actually Works:
When you use cryptocurrency, all transactions are recorded on a shared list called the blockchain. Instead of one bank or company keeping this list, lots of computers all over world—called nodes—each have a copy of it. Think of blockchain like a giant notebook that’s shared with everyone in the world. Every time someone sends or receives crypto, a note is added to this notebook. Once something is written in it, it can’t be changed. That makes it extremely secure and trustworthy.
When you send cryptocurrency to someone, your transaction is sent out to all these computers. They work together to check if everything is okay—like making sure you have enough money to send and that the transaction follows the rules.
If most of these computers agree the transaction is good, your transaction is grouped with others into a block. This block is then added to the chain of previous blocks—the blockchain—like adding a new page to a never-ending book.
All of this happens through code and computers, running non-stop across the globe. Instead of relying on banks or governments, crypto works through a system where everyone keeps track, making it open, fair, and accessible.
We can use crypto to buy gift cards, shop online, invest, or send money to family abroad however prices can go up and down quickly, the idea behind crypto is to give people more control over their own money.
Accounting for Cryptocurrency:
Classification of Cryptocurrency:
Cryptocurrencies are generally classified as intangible assets and accounting done as per ASC 350-60.
Initial Measurement:
As per ASC 350-60-30-1, when a crypto asset is purchased, it should be recorded at its purchase cost. An entity shall account for transaction costs to acquire a crypto asset, such as commissions and other related transaction fees, as expenses when incurred unless the entity is required or permitted to capitalize those costs in accordance with other Topics.
Subsequent Measurement:
As per ASC 350-60-35-1:
- Crypto assets must be reported at fair value on the balance sheet.
- This ensures the asset reflects current market conditions.
- Fair value changes (gains or losses) must be recognized
- These changes are recorded in the net income of the period.
- This provides transparency in financial performance related to crypto transactions.
Statement of Financial Position:
Conclusion: Building a Financially Resilient Organization
As per ASC 350-60-45-1:
Crypto assets must be presented separately from other intangible assets on the balance sheet.
Companies may also choose to give a more detailed breakdown. This can include listing individual crypto holdings or grouping them by asset class.
Disclosures:
- At interim and annual reporting periods, an entity shall disclose the following for each significant (as determined by the fair value) crypto asset holding:
- Name of the crypto asset
- Cost basis
- Fair value
- Number of units held.
- At annual reporting periods, an entity shall disclose the method used to determine its cost basis for computing gains and losses.
- At annual reporting periods, an entity shall provide a reconciliation, in the aggregate, of activity from the opening to the closing balances of crypto assets, separately disclosing changes during the period attributable to the following:
- Additions.
- Dispositions.
- Gains included in net income for the period, determined on a crypto asset-by-crypto-asset basis. Each crypto asset holding that has a net gain from the change in the fair value as included in net income for the period shall be included in the gains line.
- Losses included in net income for the period, determined on a crypto asset-by-crypto-asset basis. Each crypto asset holding that has a net loss from the change in the fair value as included in net income for the period shall be included in the losses line.
- An entity shall disclose the following information about the reconciliation
- description of the nature of activities that result in additions (for example, purchases, receipts from customers, or mining activities) and dispositions (for example, sales or use as payment for services)
- Total amount of realized gains and losses from dispositions
- If not presented separately, the line item in which gains and losses are reported in the income statement.
Revaluation:
Under current US GAAP for intangibles:
Revaluation:
The new guidance under ASU 2023-08 recognizes crypto assets as intangible assets; however, it has substituted the impairment model with fair value measurement. Thus, the reporting entity measures crypto assets at fair value in each reporting period and recognizes changes in net income.
ASC 350-60-35-1 provides guidance on how to measure crypto assets after initial recognition:
- They are initially recorded at cost
- Subsequently measured at fair value
- Changes in fair value (gains or losses) are recognized in net income
Tax Implications:
Crypto assets should be treated as property, for tax purposes. As a result, general tax rules for property transactions apply to crypto assets. Taxpayers may categorize their crypto holdings as business assets, investment assets, capital assets, or inventory, depending on how they are used.
Capital Gains Tax:
Capital Gains Tax applies when a cryptocurrency is disposed of:
- Selling crypto for fiat currency
- Trading one crypto for another
- Using crypto to buy goods or services
Holding Period Tax Treatment:
If a crypto asset is held for one year or less, any profit is considered a short-term capital gain. If the asset is held for more than one year, the profit is treated as a long-term capital gain.
Gain/Loss = FMV on date of disposal – cost basis
Income Tax:
Income tax applies when you receive cryptocurrency as:
- Compensation for services
- Mining or staking rewards
- Airdrops or promotional rewards
Income = FMV on the date received
This amount also becomes your cost basis for future gains/losses.
Example of Cryptocurrency Accounting Entry:
1. Buy Bitcoin using bank account:
Company buys 1 BTC for $30,000 using its bank account.
| Dr. Intangible Asset – Bitcoin | $30,000 |
| Cr. Bank | $30,000 |
2. At the end of year 1 (if value drops):
Later, Bitcoin’s fair value drops to $24000. US GAAP requires impairment.
| Dr. Unrealized loss on Crypto (P&L) | $6,000 |
| Cr. Intangible Asset – Bitcoin | $6,000 |
3. At the end of year 2 (if value raises):
Fair Value Increases to $36,000 → Record Unrealized Gain
| Dr. Intangible Asset – Bitcoin | $12,000 |
| Cr. Unrealized Gain on Crypto (P&L) | $12,000 |
4. Sell Bitcoin for $37,000 through bank:
Company sells 1 BTC for $37,000. Book value after revaluation is $36,000.
| Dr. Bank | $37,000 |
| Cr. Intangible Asset – Bitcoin | $36,000 |
| Cr. Gain on Sale of Crypto (P&L) | $1,000 |
Conclusion:
Cryptocurrency is a digital, decentralized asset secured by blockchain technology, enabling transparent and secure transactions without the need for intermediaries. From an accounting point of view, crypto assets are typically classified as indefinite-lived intangible assets under ASC 350-60 and must be measured at fair value, with gains or losses recognized in the income statement.
These assets should be presented separately on the balance sheet and supported with detailed disclosures, including cost basis and fair value at reporting date. For businesses like exchanges or broker-dealers, crypto may be treated as inventory and marked to market.
Author :
Sasikanth Reddy and Shubham Gupta