Accounting for crypto-assets and financial transaction tax

It is not only because of the FTT that we are seeing an upward curve in our practice of companies that we account for using cryptoassets in standard business operations. Thus, in addition to the group of investment companies (they invest through POs because it is more profitable than through FOs), crypto companies (their main activity is linked to the crypto asset market), there are more and more companies that do not deal with the crypto asset market, but use crypto assets, for example, for payment transactions. So our role as accountants is a bit more diverse. But that’s what we’re here for. So if you are interested in having us do the bookkeeping for your company, please let us know.

Imagine that in order to avoid the new financial transaction tax ( read more about the financial transaction tax here), companies will trade with each other and pay directly with crypto-assets. This means that accountants will have to track and record these transactions in real time. As cryptoassets can fluctuate significantly in value, accurate valuation methods need to be put in place when receiving and disbursing payments in cryptoassets. In this article, let’s look at the accounting and tax aspects of accounting for cryptoassets.

What are cryptoassets and why are they important for businesses and accounting?

Cryptoassets are digital or virtual currencies that use cryptography to secure transactions and control the creation of new units. Bitcoin is the most well-known crypto asset, but there are thousands of others, such as Ethereum, Litecoin and Ripple. For businesses, cryptoassets are increasingly relevant not only as an investment tool, but also as a means of payment. More and more businesses are starting to accept cryptoassets to pay for their services and products, which opens up new opportunities for business relationships and financial transactions.

Crypto-assets are important in accounting because they represent a new form of asset that requires specific accounting treatments. For IFRS (International Financial Reporting Standards) purposes, accountants need to be able to correctly classify crypto-assets, whether as financial instruments, property or other forms of assets, while also addressing issues relating to their measurement and recognition. In addition, crypto-assets are often subject to high volatility in their value, which brings additional challenges in accounting for and reporting their status in the financial statements.

Firms that trade or invest in cryptoassets must comply with legislative rules that are constantly evolving in this area. It is also essential to understand the tax implications of cryptoasset transactions, as incorrectly accounting for or ignoring tax obligations can lead to problems with the tax authorities. Cryptoassets present a new challenge for businesses and accounting, but also an opportunity for innovation and streamlining financial operations.

Definition of a cryptoasset in accounting

A cryptoasset is defined in accounting as a digital asset that uses cryptography to secure transactions and operates on a decentralized technology such as a blockchain. In an accounting context for IFRS purposes, crypto-assets are not classified as a traditional currency as they do not meet the traditional criteria of standard currencies (e.g. legal tender), but rather as an intangible asset or investment.

Accounting standards such as IFRS consider crypto-assets as assets that are usually recognised on the balance sheet. Their valuation can be complicated due to their high volatility, and may require the use of methods such as fair value or historical cost, depending on just how the crypto-asset is classified. Accountants need to take these factors into account when deciding how to recognise, value and classify crypto-assets in financial statements, and issues relating to their taxation and regulation are also important.

Classification of crypto-assets in accounting

There is no clear consensus in the accounting profession on how exactly to classify crypto-assets as they are not considered traditional currencies or financial instruments. Their classification may vary depending on the specific accounting standard and the purpose for which the company uses them. In general, cryptoassets are classified according to the following three main categories:

• Cryptoassets as intangible assets: in many cases, cryptoassets are classified as intangible assets under IAS 38 (International Accounting Standard for Intangible Assets). Crypto-assets do not have a physical form, which is one of the key factors for this classification. Enterprises may hold them for a long period of time with the expectation of economic benefit from their use or trading. As an intangible asset, cryptoassets are measured at either cost or fair value and are subject to impairment testing, similar to other intangible assets.
• Cryptoassets as inventory: if a firm actively trades cryptoassets, for example cryptocurrency exchanges or brokerage firms, cryptoassets may be classified as inventory under IAS 2 (inventory). In this case, the cryptoassets are held by the firm for the purpose of profiting from price differences or broker margins. Cryptoassets in this category are measured at fair value less costs to sell.
• Cryptoassets as an investment or financial instrument: some firms may hold cryptoassets purely for investment purposes. Although crypto-assets do not officially meet all the criteria for a financial instrument under IFRS 9 (financial instruments), in practice they may be treated as financial investments, especially if they represent a financial asset for the holder under the IAS 32 classification. In this case, they are measured at fair value under IFRS, with changes in value recognised in the income statement and other comprehensive income.
• Cryptoassets as digital assets: although cryptoassets do not have a clearly defined legal status as digital assets in traditional accounting standards, some countries or firms may consider cryptoassets as a separate category of so-called digital assets, which may include various forms of digital assets (e.g. tokens, NFTs). This categorization may evolve as regulatory and accounting frameworks for cryptoassets and blockchain technology develop.

Summary:

• An intangible asset if they are held for the long term and are not planned to be sold in the near term.
• Inventories, if they are actively traded as goods.
• An investment or financial instrument if it constitutes a financial asset for the holder under the classification of IAS 32.
• The digital asset may be expanded in the future depending on the development of accounting standards.

Costs and profits of cryptoassets – how to record them?

When accounting for the costs and benefits of crypto-assets, precise procedures must be followed that take into account the specificities of these digital assets. Accounting for the costs and benefits of crypto-assets can be complicated by their volatility, different methods of acquisition and use, or regulatory requirements. The following is an overview of how to properly record the costs and gains from cryptoasset transactions.

Costs associated with cryptoassets

The cost of cryptoassets may include several types of expenses that need to be accurately accounted for. These costs include:

Cost of purchasing crypto-assets

If a firm purchases cryptoassets, this cost is accounted for as an asset purchase. The purchase price of cryptoassets is recorded at the market price at the time of acquisition, including any fees (e.g. transaction fees on exchanges). There are various methods of valuing the cost of cryptoassets, such as:

• FIFO (First In, First Out): the first crypto asset bought is the first one sold.
• Weighted average: the average price of all cryptoassets acquired.

These methods allow better tracking of the value of cryptoassets as their market price changes.

Transaction costs (fees)

When trading cryptoassets, various transaction fees are often paid to exchanges or network fees (so-called “gas fees” for Ethereum). These fees need to be accounted for as costs that reduce the resulting profit from the transaction.

Cryptoasset mining costs

If a company mines crypto-assets, it must keep track of the costs associated with mining, such as electricity, hardware, maintenance and other operational costs. The crypto-assets obtained by mining are recorded in the books in off-balance-sheet records and the expenses related to their mining are charged to expenses.

Profits from cryptoassets

Gains on crypto-assets are recorded in the accounts when a firm sells or exchanges crypto-assets or, in some cases, when their fair value increases. Gains may be taxable, so it is important to record them accurately.

Realised gains

Realized gains arise when a firm sells a cryptoasset at a higher price than the price at which it acquired it. These gains are recorded as income and are subject to taxation depending on the applicable tax rules. The realised gain is calculated as the difference between the sale price and the acquisition price (according to the valuation method used, e.g. FIFO).

Unrealised gains (changes in fair value)

Unrealised gains or losses arise when the value of a cryptoasset changes but the cryptoasset has not been sold. These gains or losses may be recognised in the accounts under the fair value measurement of cryptoassets. Under IFRS, changes in the value of cryptoassets may be recorded directly in the statement of profit or loss and other comprehensive income.

Taxation of gains and losses

The taxation of crypto-asset gains depends on the tax laws in the specific country. In most countries, gains from the sale of cryptoassets are considered capital gains and are subject to income tax. Companies must track each transaction to correctly calculate tax liability. In some jurisdictions, cryptoassets may also be taxed as ordinary income if they are used for ordinary business purposes.

Losses from crypto-assets

Losses on crypto-assets arise when crypto-assets are sold for less than their purchase price. These losses can be used to reduce the overall tax base. Similar to gains, accurate data on the purchase and sale price of a cryptoasset must be recorded.

Summary:

• The cost of cryptoassets is recorded as an asset purchase, comprising the purchase price and transaction fees.
• Realised gains arise when a cryptoasset is sold at a higher price than its purchase price and are subject to taxation.
• Unrealised gains are the result of a change in the market value of a cryptoasset that has not yet been sold.
• Gains and losses on cryptoassets must be properly recorded due to tax obligations and accounting rules.
• Accurate recording of these transactions is key to proper taxation and reporting of the company’s financial position.

Cryptoassets as non-current assets under IFRSs

Cryptoassets may also be classified as non-current assets under IFRS accounting if they are held for investment for an extended period of time and not for current trading purposes or immediate consumption. Non-current assets are assets that a firm intends to hold for more than one accounting period and that it expects to generate future economic benefits. For crypto-assets that meet these criteria, there are specific accounting procedures to ensure that they are properly recorded and valued.

Crypto-assets, if classified as fixed assets, are not subject to normal depreciation as their value is not dependent on physical wear and tear as is the case with tangible assets. However, firms must periodically perform impairment testing to determine whether a cryptoasset has impaired in the marketplace. If an impairment is identified, this loss must be recorded and reflect the current market value.

Cryptoassets are still in a legal and regulatory vacuum in many countries. Legislation is adapting over time and firms that classify cryptoassets as fixed assets need to closely monitor the evolving regulatory framework in their region to avoid potential legal issues or accounting errors.

Taxation of income from cryptoassets

The taxation of income from cryptoassets is currently a very topical and dynamic issue. With the growing popularity of digital currencies, more and more countries are trying to adapt their tax systems to include income from this area.

Basic principles of taxation of cryptoassets

• Income from sale: the basic principle is that the income from the sale of a cryptoasset, i.e. the difference between the purchase and the sale, is taxable.
• Exchange for goods or services: the exchange of a crypto-asset for goods or services is also considered a taxable event.
• Holding crypto-assets: the appreciation of a crypto-asset during the holding period is usually taxed only when it is sold or exchanged.
• Mining of crypto-assets: income from mining of crypto-assets is also considered taxable.

In Slovakia, the taxation of income from cryptoassets is governed by the Income Tax Act. According to this Act, income from the sale of cryptoassets is considered taxable income. It is important to note that the exchange of a cryptoasset for another cryptoasset, good or service also constitutes a taxable event.

To learn more about cryptoasset taxation, feel free to book a consultation with our cryptoasset taxation and accounting specialists.

Cryptoassets and VAT

VAT is a basic excise duty that applies to most goods and services. However, when we talk about cryptoassets, the situation is a little more complex.

Current situation in Slovakia:

• Unclear situation: in Slovakia it is not entirely clear how VAT should be applied to transactions with crypto-assets.
• Dependence on specific transactions: VAT may be applicable depending on the specific type of transaction (e.g. sale of a crypto-asset for fiat currency, exchange of a crypto-asset for a good or service).
• Need for professional advice: due to uncertainties, it is important to consult Highgate Group as experts in the tax aspects of cryptoassets on a case-by-case basis in order to obtain accurate information for your specific case.

Legal framework for cryptoassets in Slovakia

Slovak legislation is gradually adapting to the rapidly developing world of cryptoassets. While in the past there was no specific legislation regulating this area, significant changes have taken place in recent years.

Current state of Slovak legislation:

• MiCA (Markets in Crypto-Assets): the European Union has adopted the comprehensive MiCA regulation, which sets out uniform rules for the entire cryptoassets market. This regulation is gradually being transposed into national laws, including Slovakia.
• National legislation: Slovakia already has laws in place regarding the provision of services related to cryptoassets. These laws regulate, for example: mandatory licensing by the National Bank of Slovakia (NBS), consumer protection, anti-money laundering.

Current state of international regulation:

• The already mentioned MiCA
• FATF (Financial Action Task Force): an international organisation that has issued recommendations for the fight against money laundering and terrorist financing, which also apply to cryptocurrency service providers.
• International Accounting Standards (IFRS): do not contain specific provisions for crypto-assets, but provide general principles that can also be applied to the accounting for crypto-assets.

Practical tips for companies when accounting for cryptoassets

Accounting for cryptoassets within a firm can be complex due to their volatility and regulatory requirements. In order for firms to properly deal with the accounting for cryptoassets and meet regulatory and tax requirements, it is important to follow certain procedures and policies. Here are some practical tips for firms when accounting for cryptoassets:

• Proper valuation of crypto-assets: Crypto-assets should be valued at their current market value (fair value) when bought and sold. It is important to have an accurate record of the price of cryptoassets at the time of the transaction. For this, companies can use data from exchanges or API services to track prices. When accounting, firms should be prepared for the fact that the value of cryptoassets can fluctuate significantly. It is therefore important to use standardised valuation methods (e.g. FIFO – first in, first out or purchase price averaging).
• Cryptoassets as intangible assets: currently, cryptoassets are classified as intangible assets in most accounting standards (e.g. IFRS). This means that they are treated similarly to patents or software. When measuring intangible assets, it may be critical whether the crypto-assets are held long-term as an investment or used by the company for operational payments.
• Records and documentation of transactions: it is essential to keep accurate records of all crypto transactions, including the date, type of transaction (buy, sell, exchange), quantity and price at the time of the transaction. This information is crucial for accounting and tax returns. Using software tools such as CoinTracking, Koinly or Cryptio can make it easier to track transactions and account for them correctly.
• Taxes and tax liabilities: firms should regularly perform capital gains and losses calculations on crypto-assets to correctly report income or losses for income tax purposes. With cryptoassets, capital gains may also be subject to health levies, which should be taken into account in tax planning.
• Use the right accounting software: although many traditional accounting software (e.g., Cool, Money S3) do not have native support for cryptoassets, most of them allow you to manually add cryptoasset transactions. For better integration, tools such as Cryptio or BitPay can be used to connect accounting systems via APIs.
• Accounting for crypto-assets on receipt of payments: when accepting crypto-assets as payment for goods or services, the value of the transaction must be immediately converted into euros or another fiat currency.
• Managing volatile gains and losses: when cryptocurrencies are sold or used to purchase goods and services, capital gains or losses may need to be recognised if the value of the cryptoasset has changed since it was purchased. This change in value should be included in the accounting so that income or losses can be properly recognized. For long-term holdings of crypto-assets, particularly for IFRS, it is necessary to revalue intangible assets on a regular basis and to reflect changes in their market value in the financial statements.
• Tax optimization: firms should consider timing sales of cryptoassets to minimize capital gains. Selling cryptoassets at times of lower value can reduce the tax burden.

As you can see, accounting for cryptoassets is complex and quite complicated, so it is important to consult with specialists in tax law and cryptoasset accounting to ensure that all regulations are followed while maximizing tax efficiency. That’s exactly what you’ll find at Highgate Group – modern advisors for your law and tax, accounting, crypto.

The future of cryptoasset accounting

The accounting for cryptoassets in Europe has been the subject of intense development, particularly in the context of regulations and new laws being proposed and adopted at the European Union (EU) level. This area is changing rapidly due to the growing popularity of crypto-assets such as Bitcoin, Ethereum, and other digital assets, which are having a significant impact on financial markets and investments.

The key factors affecting the future of cryptoasset accounting in Europe are currently mainly:

1. MiCA (Markets in Crypto-Assets) regulation: one of the most important steps is the adoption of the MiCA regulation to harmonise the rules for crypto-assets across the EU. The regulation focuses on various aspects of crypto-assets, including investor protection, fraud prevention and strengthening market stability. MiCA has an impact on accounting practices as it clearly defines what is considered a cryptoasset, virtual assets and tokens, and what regulatory requirements must be met by entities that deal with them. This will affect how cryptoassets are classified on the books, as well as the rules for their valuation and reporting.
2. IFRS and national accounting standards: currently, International Financial Reporting Standards (IFRS) do not provide specific guidance on crypto-assets. Most accountants classify them as either intangible assets (IAS 38) or inventories (IAS 2), depending on the purpose for which they are used. This leads to different approaches to the valuation of crypto-assets (historical cost or fair value), which can be ambiguous for accounting teams. National accounting authorities in different European countries may adopt different approaches, although the EU tends to harmonise these rules on the basis of IFRS.
3. Taxation and accounting challenges: taxation of cryptoassets is another area where the rules will directly affect accounting processes. EU countries differ in their approach to the taxation of cryptoassets. Some tax them as capital gains, while others treat them as business income. Any changes to the taxation of crypto-assets will have a direct impact on accounting, and accountants will need to ensure correct tax reporting based on changes in legislation.
4. Transparency and auditability: with the growing popularity of cryptoassets comes new requirements for transparency and auditability. European companies holding or trading crypto-assets will have to comply with strict rules on disclosure and reporting of risks associated with digital assets. This includes not only accounting standards, but also internal controls that will need to be in place to ensure the accuracy of accounting.
5. Technological challenges and opportunities: with blockchain technology underpinning cryptoassets, there are also new opportunities for automating accounting processes and improving transaction security. However, the implementation of these technologies into traditional accounting systems will require large investments and transformations.

Questions on accounting for cryptoassets (FAQ)

Why are cryptoassets becoming relevant to corporate transactions and accounting?

In a nutshell:

• Speed and low transaction costs: cryptoassets enable fast and cheap cross-border transactions without the need for traditional banking intermediaries.
• Decentralisation and security: transactions on blockchain technology are transparent and secure, reducing the risk of fraud.
• Global acceptance: more and more companies are accepting cryptoassets as a form of payment, which increases their relevance in business transactions.
• Investment potential: some firms hold cryptoassets as investment assets, which has an impact on their financial statements.
• Regulatory framework: with new regulations such as MiCA, firms will need to include cryptoassets in their accounting and reporting in accordance with the law.

Will stablecoins replace financial transactions subject to the new tax?

Stablecoins have the potential to replace some traditional financial transactions, but full replacement depends on a number of factors, including regulations and acceptance by governments and businesses. Stablecoins are digital assets whose value is pegged to stable fiat currencies (e.g. USD or EUR) and thus can provide benefits such as speed and lower transaction costs, similar to cryptoassets, but without their volatility.

New financial transaction tax applies to crypto payments

Currently, there is no single financial transaction tax at EU level that specifically applies to crypto-assets. However, some countries are introducing their own taxes and regulations on crypto-assets.

Is it worth it for companies to accept payments in cryptoassets via POS terminal (card payment)

For many businesses, accepting payments in cryptoassets via POS terminals can be advantageous, especially if they are targeting international customers or looking to reduce transaction fees. However, it is important to consider the potential risks, particularly the volatility of cryptoassets and potential regulatory changes. Firms should also consider partnering with providers that offer the ability to instantly convert cryptoassets into fiat currencies to reduce the risk of fluctuations in value.

Pay by card or Bitcoin/Lightcoin, what are the technical options

If you want to pay by card or cryptoassets (such as Bitcoin or Litecoin), there are a number of technical solutions that companies can implement to accept payments. These options allow businesses to accept both forms of payment through a variety of payment systems and devices.

When paying with Bitcoin or Litecoin instead of a VISA card, there are technological options such as “Crypto POS terminals” (BitPay, Coinbase Commerce or NOWPayments) or QR codes and mobile apps that send crypto assets directly to the merchant’s wallet instantly.

eCash and cryptoassets

In Slovakia, the eKasa system is a system introduced for electronic recording of sales, which allows the Financial Administration to monitor all sales and payments received in real time. However, currently the eKasa system does not support the direct acceptance of crypto-assets as a method of payment. Crypto-assets such as Bitcoin, Litecoin and others are not officially recognized as legal tender and are therefore not directly included in the eKasa regulations.

Accounting software suitable for cryptoasset transactions

For companies that want to include cryptoassets in their accounting, it is important to choose software that can properly track transactions on the blockchain, calculate capital gains and losses, and meet regulatory and tax requirements. Software such as QuickBooks, Xero, Cryptio and specialized solutions such as Gilded or Koinly offer suitable solutions to manage cryptoasset transactions in accounting systems.

There is not a large number of accounting software in Slovakia that has native support for cryptoassets and at the same time fully complies with local legislation, namely Slovak accounting regulations and tax laws. However, there are several solutions that can be adapted to account for cryptoassets and at the same time be compatible with accounting standards and regulations in Slovakia.

If you are more interested in this topic, you can book a consultation here: