Accounting Implications of Cryptocurrency in India: CA Aishwary Gupta

Cryptocurrencies or virtual currencies have been one of the biggest talking points since January since the schedule of Lok Sabha was out mentioning The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021. Though officially there have been no statements banning or terming the cryptocurrencies as illegal, the retail investors have been pouring their money constantly into the cryptocurrency market owing to the high returns it has been giving them. 97% of the people who have ever invested in Bitcoin are in profits.

Till March’21 there have been over 7 Million Indian users who have either held or are currently holding cryptocurrencies with them. Though not considered as a legal tender of money, like Gold, cryptocurrencies are being used to accept payments, trade, earn interest incomes like fixed deposits known as staking, take out loans against crypto, earning interests like saving banks accounts, providing liquidity into the pools of decentralized platforms like Uniswap and much more. Further, with no guidelines as to how to treat the same, it is turning out to be a tough task to account for it and even calculate taxes on it.

What are the Accounting Implications of Cryptocurrency in India?

#1. No Guidelines

The accounting standards in India do not have any guidelines for accounting for this market. One of the major issues here is, being a 24/7 market it’s difficult to adopt a closing price for valuation purposes. There are no benchmarks and due to inefficiencies in the market price, disparities among various exchanges across the globe also exist. Various websites have applied algorithms to derive the closing prices of the cryptocurrencies for accounting purposes but none have any governing body certifications.

#2. One Law Cannot Fit All

Another practical issue with accounting is the classification of cryptocurrencies. All cryptocurrencies have different use cases. Thus, they cannot have a blanket classification saying it’s a capital asset or a tradable commodity. Also, for the same cryptocurrency different organizations have different use cases. For example, in greyscale Bitcoin is being used as a medium of exchange. They are paying their board members in Bitcoin. Meanwhile, Tesla is holding it in its treasury as an investment so there it assumes the title of capital investment.

Talking about various crypto assets like a security token which is a fractional tokenized format of a share like that of Tesla being traded on exchanges like FTX and Binance so these assets need to be treated as an equity share while ETHER is a utility token that helps run the whole ecosystem of Decentralised Finance and Smart contracts on Ethereum which can again be classified as a medium of exchange for this particular ecosystem. Similarly, we have so many different classifications of cryptocurrencies. Hence, there need to be proper guidelines as to which cryptocurrency is a capital asset; which is just a medium of exchange based on their use cases.

#3. "Laws" of Cash do not apply to it

Let’s see how we can refer to IFRS for accounting purposes. You can term it as a medium of exchange and equate it to cash when you see it for the first time, but as defined in IAS 7 and IAS 32, it doesn’t have one of the major quality of cash which is, “It’s not readily exchangeable for goods and services which are taken by anyone”. Entities may choose to do so but they are not legally bound to do so.

We can argue and as per IFRS 9, we can value cryptocurrencies at Fair Value through Profit and Loss (FVTPL). However, as per the definition of a financial instrument, it does not represent cash, an equity interest in an entity, or a contract establishing a right or obligation to deliver or receive cash or another financial instrument. Cryptocurrency is not debt security, nor equity security (a security token is backed by original securities of an entity but they are not actual equity shares) because it does not represent an ownership interest in an entity. Therefore, it appears cryptocurrency should not be accounted for as a financial asset.

#4. Can Cryptocurrency be an Intangible Asset?

IAS 38, which talks about Intangible Assets does seem to apply here. An asset is defined as an Intangible Asset if it is separable or arises from contractual or other legal rights. An asset is separable if it is capable of being separated or divided from the entity and sold, transferred, licensed, rented, or exchanged, either individually or together with a related contract, identifiable asset, or liability.

Cryptocurrencies are capable of being separated by the holder and sold or transferred individually. As per IAS 21, it does not give the holder the right to receive a fixed amount of income or a determinable number of units of currency. However, with recent developments in farming and staking, this also is not completely applicable. This could be by far the best classification of cryptocurrencies.

#5. Time-Value of Cryptocurrency

One also needs to determine the life of these cryptocurrencies as well. Whether they have a finite life or are indefinite. As of now, cryptocurrencies appear to have an indefinite life. They should be considered that only where we test for its impairment on an annual basis.

We can also try and value cryptocurrencies as per the IAS 2 which relates to the inventory valuation. IAS 2 defines inventories as assets that are held for sale in the ordinary course of business and the process of production for such sale, or in the form of materials or supplies to be consumed in the production process or the rendering of services.

For example, an entity may hold cryptocurrencies for sale in the ordinary course of business. If that is the case, then cryptocurrency could be treated as inventory. Normally, this would mean the recognition of inventories at a lower cost and net realizable value. However, if the entity acts as a broker-trader of cryptocurrencies like that of a cryptocurrency exchange, then IAS 2 states that their inventories should be valued at fair value with fewer costs to selling. This type of inventory is principally acquired to sell soon; thus, generate a profit from fluctuations in price or broker trader's margin. Thus, this measurement method could only be applied in very few circumstances. Mostly where the business model is to sell cryptocurrency soon to generate a profit from fluctuations in price.

Summing Up!

So, accounting for cryptocurrencies is not as a simple task as it may seem during this time. And the reasons are pretty evident from my above citations. Ministry of corporate affairs has requested a declaration by the companies from 1st April regards cryptocurrencies. The declaration asks if the company has traded or invested in crypto and if yes declare the following:

• Profit or Loss arising from such trade.
• Amount of cryptocurrency held on a particular date.
• Deposits or advances from any person for trading or investing in cryptocurrency.