Bitcoin or Ether in Your Balance Sheet? Here's What You Need To Know

Cryptocurrency is gaining acceptance worldwide, with the increasing popularity of digital assets such as Ethereum and Bitcoin likely to propel market growth even further in the coming years.

According to Statista, there were more than 6,000 cryptocurrencies in 2021. In fact, some endorse cryptocurrency as the future of finance, with companies such as Tesla, MicroStrategy and Square adding Bitcoin to their balance sheets.

In this digital age, the crypto trend is here to stay. So should you put Bitcoin or Ether on your balance sheet? Read on to find out more. If you need more immediate help, talk to our experienced accountants in the UK.

What Is a Balance Sheet?

Also known as a ‘statement of financial position’, a balance sheet is designed to reflect the value of a company or organisation. The balance sheet shows the company’s assets and liabilities, as well as the owners’ equity (net worth) as of a particular date, otherwise known as the ‘reporting date’. It goes hand in hand with two other key financial statements used to evaluate a business  — an income statement and cash flow statement. All these financial statements can be prepared by accounting services.

A balance sheet is generally prepared and distributed on a monthly or quarterly basis, with its frequency of reporting being determined by the company policy or by law.

What Is the Purpose of a Balance Sheet?

A balance sheet provides a snapshot for business owners and investors alike to better understand and gauge the general financial health of their business, on top of what the company owns and owes.

What Is Cryptocurrency?

Cryptocurrencies are intangible monies that exist in the form of digital tokens or coins based on blockchain technology. Most cryptocurrencies are not issued by a central authority, which means, in theory, they should be immune from government interference.

Bitcoin vs Ether

Bitcoin is the first cryptocurrency and the best known of the 6,000 cryptocurrencies in existence today. Created in January 2009, Bitcoin follows the ideas detailed in a whitepaper by the mysterious Satoshi Nakamoto. One of the great mysteries of the digital age, the person or group behind the pseudonym Satoshi Nakamoto has never been uncovered.

Ethereum is the world’s second-largest cryptocurrency. It’s also known as the native transactional token that facilitates operations on the Ethereum network, an open-source blockchain platform. In 2013, Ethereum was founded by Russian-Canadian programmer Vitalik Buterin and a few other crypto entrepreneurs, many of whom were previously involved in Bitcoin.

Although Bitcoin may be the most popular cryptocurrency, Ethereum dramatically outperformed the more volatile Bitcoin in 2021, a trend that is likely to continue this year. While Bitcoin will release no more than 21 million coins, there’s no cap on the number of potential Ethereum tokens.

Is Cryptocurrency Considered Cash?

Let’s start with considering the UK's Financial Reporting Standard (FRS 201) definition of cash:

As such, cryptocurrencies aren’t considered cash because they:

1. are highly volatile
2. aren’t government- or state-issued legal tender
3. have low liquidity into fiat money

Accounting for Cryptocurrency

Cryptocurrency can be considered a tangible asset because it fits the FRS 102 definition:

Although cryptoassets are intangible, you’re still expected to account for these transactions. Currently, neither International Financial Reporting Standards (IFRS) or Generally Accepted Accounting Practice in the United Kingdom (UK GAAP) have specific guidelines on cryptocurrency accounting. How you manage this depends on your business and the strategic nature of the original cryptocurrency investment.

How Should I Record Cryptocurrency and Other Digital Assets?

While cryptocurrency transactions come with complications, they’re still an asset, so fundamental accounting principles should still apply.

When your company buys cryptocurrency, the asset should be added to your balance sheet at fair market value on the date you bought it. You should then debit your asset’s account. If you bought cryptocurrency with fiat currency, you would credit your cash account for the same amount.

When your company sells cryptocurrency, you reverse the process. So you would credit your asset’s account, remove the value of the asset from your balance sheet, and debit the cash amount generated from the sale.

If the proceeds of the sale are a lot higher than your asset’s current book value - in other words, if the value has gone up due to appreciation, impairment or both - you could also credit the difference between the book value and received proceeds to a capital gains account.

How Do I Record Business Payments to Vendors?

If you pay a vendor with cryptocurrency, you’ll have to record the transaction in the same way as if you were selling it. As it’s considered a disposal, there would be a capital gain for the difference between the digital asset’s book value and the expense.

Bitcoin on Your Balance Sheet

Elon Musk likes having Bitcoin on Tesla’s balance sheet, but should you be doing the same? While there’s no fixed accounting regulations, here’s what you should know when it comes to having Bitcoin as a corporate reserve asset:

Advantages

• A future-first approach in accounting

Tesla and Square have both disclosed their large Bitcoin investments. In Q2 2021, Tesla's unaudited balance sheet revealed a net digital asset value of $1.311 billion. Square intends to hold Bitcoin for the long term, and the cryptocurrency represents approximately 5% of Square's cash.

• An asymmetric risk return, where the potential for profit or loss is imbalanced. For instance, if you were to risk $10 playing jackpot at the casino, but the potential return is $40, this would be deemed as an asymmetric risk.

In terms of cryptocurrency, we can look at how Bitcoin has gained popularity over the years. In 2010, the price of Bitcoin was less than US$1. Fast forward to 2020, Bitcoin was priced at $9,350. Bitcoin has witnessed its price increase by a whopping 9,000,000% in slightly over eleven years of existence

• You’ll be prepared for if/when Bitcoin becomes a mode of payment
• More value growth as an investment than saved as cash

When you put your money into a savings account, you run a low risk of loss of funds. However, you will also enjoy minimal gains. On the contrary, investing in cryptocurrency means there is potential for better long-term rewards or gains, but there is also a potential for loss.

Disadvantages

• Many investors point out that Bitcoin is far too volatile to be a store of value

Ethereum on Your Balance Sheet

Ethereum might be Bitcoin’s cousin, but this cryptocurrency comes with its own set of benefits and drawbacks. However, instead of ending up as corporate reserves on your balance sheet, it’s more likely to appear in working capital.  

Ether is required to power Ethereum’s applications, either for the transaction fees or as an input.  Any business who wishes to utilise Ethereum for internal processes, including yield optimisation, collateral allocation, contract management, or for client-facing services, will need a stable supply of Ether.

Advantages

• Unlike Bitcoin, Ethereum has infinite supply, often regarded as a store of value
• Ethereum is seen as a technology that’s likely to impact governance, markets, public services, energy and more
• Ethereum is gaining acknowledgement as a consumable commodity
• Ethereum can be staked, which means that you can put some into a blockchain contract, and be rewarded with a level of return, like interest, which is usually higher than interest you would likely get on cash in a savings account

Disadvantages

• Modest supply growth of approximately 4% and expected to decrease over time
• Ethereum's technology is not fully formed yet, thus posing a higher risk than Bitcoin
• Staking Ethereum comes with its own risks - including dependence that you will be able to get your Ethereum back, as you will be locking it away until after Ethereum 2.0 has merged with Ethereum 1.0

Ethereum in established businesses:

Software and social media app company Meitu may already have started the ball rolling of Ethereum as working capital. In March 2021, the Hong Kong Stock Exchange listed company revealed their Bitcoin and Ether purchases. They also mentioned that the company was evaluating the feasibility of incorporating blockchain technologies to its overseas ventures, with the purchased Ethereum acting as gas reserve for the company's potential dAPPs to utilise in the future.

What About Tax?

Like in most territories, the UK tax office considers cryptocurrencies to be assets and not currencies. This makes cryptocurrencies a poor choice of payment but a viable option as a store of value; holding volatile cryptocurrencies is seen as less risky from a tax viewpoint because it’s only evaluated when you buy it, and not again during year end. This also means that regardless of whether you’re holding a tracker fund or Bitcoin itself, it will be taxed in the same way.

Depending on your company’s activity, the disposal of cryptocurrency is treated as a capital disposal. This means that your company is liable to 19% corporation tax in your business’s financial year.

You’ll see a capital gain where the proceeds from cryptocurrency disposal is greater than the original value. You’ll get a capital loss where the proceeds from cryptocurrency disposal is less than the original value. This can counterbalance any capital gains made in the same period. Alternatively, you could carry the loss forward to counterbalance any future gains in the next financial year.

When cryptocurrency is collected in return for goods and services, the situation becomes more complex. HM Revenue & Customs (HMRC) doesn’t treat the exchange of cryptocurrency as a form of currency or money, so corporation tax legislation - including the foreign currency rules - aren’t applicable. As such, the cryptocurrency value at time of receipt will have to be accounted for inside your taxable trading profits. If the business receiving the cryptocurrency doesn’t dispose of it during the point of receipt, the capital gain or loss will be carried forward into future disposals.

Profits from your cryptoassets are likely to be seen as a capital gain because HMRC generally views this profit as an investment, and is taxed through the Capital Gains Tax (CGT) system. If your company conducts business entirely in cryptocurrency, you’ll have to factor in provisions at point of sale to justify taxes such as Corporation Tax, PAYE and VAT.

Stay on Top of Emerging Trends While Remaining Compliant

Cryptocurrencies are an emerging, innovating trend for people to invest in their digital portfolios. However, digital assets can be volatile and affected by influential individuals, so it’s important to get the tax treatment right.

Free yourself from the admin work and let us handle your company's accounting, taxes and reports. Our Osome experts can take over paperwork, cross-check data, and submit your annual reports. You’ll also have advice from experienced Chartered Accountants to help pay tax smartly and correctly manage your assets and liabilities. Chat with us now.