Is Cryptocurrency A Financial Asset? - A Guide For Beginners
Is cryptocurrency a financial asset? This question pops up a lot since Bitcoin becomes popular in the early 2010s. Even in recent times, cryptocurrencies are not yet understood by a lot of people. Is it property, an investment, or something more relatable to money?
This article will discuss if you can call cryptocurrency a financial asset. We will show you how accounting principles see and treat cryptocurrency.
To understand the answer to—is cryptocurrency a financial asset? We can start this discussion by defining the terms cryptocurrency and financial asset first. According to the International Financial Reporting Standards (IFRS) Interpretations Committee, cryptocurrency is a digital currency that uses cryptography for security and recording transactions in its distributed ledger (aka blockchain). It is also decentralized, meaning it is not issued by an authority or a central figure.
Cryptocurrency is usually stored in wallets of different kinds. Its value changes depending on a number of factors: supply of the currency, existing demand in the market, number of other competing cryptocurrencies, and trades it makes. It is sort of like the character of a stock market. Each currency unit is like a share in the stock market. You buy crypto coin units using fiat money (the legal tenders created by government decree), then use them to purchase currencies, buy other stuff in bitcoins, trade, or just hold on to it. You could earn from it if you got the coins when their value was lower thru trade, buying it, and then selling it when its price goes up.
Defining Financial Assets
Financial assets, on the other hand, as defined by IFRS (International Financial Reporting Standards) under the IAS (International Accounting Standards) 32 Financial Instruments presents as one of the following:
- An equity instrument of another entity
- A contractual right to receive cash or another financial asset from another entity
- A contractual right to exchange financial assets or financial liabilities with another entity under particular conditions, or
- A particular contract that will or may be settled in the entity’s own equity instruments
If we would cross analyze what cryptocurrency is and if it falls under financial assets, you will find it is not. Some would argue that cryptocurrency being a digital currency, should be considered cash and recognized as a financial asset. However, cash, as defined in IAS 32, would also deny cryptocurrency as financial assets.
Even with the monetary value it has and is used in transactions in exchange for goods and services, it cannot be considered as good as cash because it is not recognized as a legal tender. Even in the United States that observes Generally Accepted Accounting Principles (GAAP) instead of IFRS, they don’t consider cryptocurrency as cash, foreign currency, or cash equivalents.
If asking is cryptocurrency a financial asset yields nothing, what would you consider your digital coins as, especially in accounting? What rules would you apply to it? To find the answer to this, let us discuss the Intangible Assets as defined by IAS 38.
As defined by IAS 38, Intangible Assets is an “identifiable non-monetary asset without physical substance.” Looking at this definition already shows you that cryptocurrencies fit this description. It is identifiable since it can be sold, transferred, or exchanged, and it has no physical substance. These are some things to take note of when curious about the question - is cryptocurrency a financial asset?
For taxation purposes, the United States’ Internal Revenue Service allowed the classification of cryptocurrency as property to tax it. It can be classified as personal property, investments, or business property. There are still lots of intricate details that should be checked in regards to accounting and taxing cryptocurrency. To learn more about cryptocurrencies, click here!
The answer to the question, is cryptocurrency a financial asset?—is a no right now. Cryptocurrency is considered as intangible assets both by the GAAP and IFRS. The accounting world is still far from accepting cryptocurrency as a substitute for cash. Some countries even penalize transactions using cryptocurrency, and some restrict it. Hopefully, in the near future, the world, along with its institutions, adapts to cryptocurrency to further its positive impact.
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