Investors And Tax Pros Need To Recalibrate Their Risk Tolerance As Cryptocurrency Enters The Corporate Tax Ledger

Whether you believe digital assets like Bitcoin, Dogecoin and Ethereum represent the greatest investment opportunity in decades or the biggest scam in history, one thing is certain: cryptocurrency is going mainstream. Not only has it become ubiquitous in investor portfolios – from some of the largest institutional funds to the most modest mom-and-pop online brokerage accounts– it’s also becoming a fixture on the balance sheets of multinational corporations.

And that’s creating some serious challenges for corporate tax departments who must now factor wild swings in valuation into their forecasting and impairment calculations. Despite being called a “currency” in the vernacular, current accounting rules require corporations to treat cryptocurrency holdings as an intangible asset. That means they have to write down the value of the asset if the price declines but can’t write up the value if the price appreciates.

We all saw a very public display of this volatility in action over the summer when Tesla reported that the value of its Bitcoin holdings fell by more than $1 billion in a single quarter, from $2.5 billion at the end of March to $1.5 billion at the end of July. That’s a pretty wild quarterly swing that has absolutely nothing to do with EV adoption, new model launches, production delays or any other aspect of Tesla’s TSLA core business, which makes it hard to anticipate for both tax teams and investors.

The challenge is not unique to Tesla. All told, corporations currently own roughly 1.6 million Bitcoin, representing about 8% of the total supply of the cryptocurrency. The largest single corporate investor in Bitcoin, the data analytics firm MicroStrategy MSTR now owns $5.4 billion in Bitcoin holdings, representing 75% of its total market cap.

The growing prominence of crypto on corporate balance sheets is not lost on regulators and standards bodies and will likely force a day of reckoning. The Securities Exchange Commission has begun to consider new regulation introducing reporting requirements designed to mitigate fraud. The Basel Committee for Banking Supervision, which sets global standards for banking regulation, has proposed that banks dealing in crypto assets should hold substantial buffers to cover potential loss. And, as part of the recent infrastructure bill, federal regulators have wrestled with outlining clear reporting requirements.

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Conspicuously absent from the conversation has been the Financial Accounting Standards Board (FASB), which establishes financial accounting and reporting standards for public and private companies that follow Generally Accepted Accounting Principles (GAAP). In June, FASB published an invitation to comment on its agenda for the year, flagging digital assets as a core area where it is seeking guidance.

Until those standards are developed, however, corporate tax departments are left managing an unwieldy asset that is subject to quarterly revaluations that disproportionately spotlight downside risk. Following current accounting rules for the treatment of intangible assets, corporate tax departments must test for impairment annually, or if the price falls below the company’s carrying value. If the value falls – as is often the case in the volatile world of cryptocurrency – and the company takes a charge, the fair value of the asset is then reset. However, if the price goes up, the company cannot record a gain. That can only happen if the company sells the asset.

In that sense, holding large quantities of cryptocurrency on the corporate balance sheet under current accounting rules is a bit like storing gun powder in a match factory. Sure, there’s a big potential upside, but if things go sideways, the explosion could be spectacular.

As of the market’s close on August 30, one Bitcoin was worth $47,464.60. One year ago? $11,655. Of course, there are a number of market factors that have recently favored a digital coin and have contributed to the growth of cryptocurrency, but will that always be the case? One needs to look back only as far as late 2018 to see Bitcoin’s plunge from its original peak in January 2018 of over $17,000 per coin to barely over $3,000 per coin: an 81% decrease in just 11 months.

That’s a lot of volatility on a corporate balance sheet, much more than anyone would expect in such a risk-averse environment. So, as multinationals move forward with this significant risk on their respective ledgers, it will be fascinating to see how they respond to the regulatory hurdles and market fluctuations that are sure to follow. We’re just in the first chapter of the crypto saga, and as far as its impact on corporations, we’re not even past the prologue. But, unless things change soon – either from an accounting rules perspective or an cryptocurrency volatility perspective – corporate tax departments and investors alike are going to need to get comfortable with outsized risk.