The founding principle behind cryptos is that they are unregulated and decentralized. However, the US government is not too concerned about these principles. The existing Generally Accepted Accounting Principles (GAAP) do not directly refer to cryptocurrencies. The main accounting question is this: if cryptocurrencies are assets, what type of assets are they when it comes to accounting reporting standards?
Different cryptos have unique characteristics and utilities. Therefore, the accounting policy for one cryptocurrency may not be suitable for others. For this reason, the US Senate decided to classify cryptos as a cash equivalent.
US Senate Infrastructure Law on Cryptocurrency and Digital Assets
According to this approved law, cryptocurrencies or any “digital assets” sold by customers of “brokers” are subject to cost-basis reporting and Form 1099-B reporting. The amended parts of the Internal Revenue Code will cover the following.
- Expand on the definition of a broker
- Require all digital assets to be treated as equivalent to “cash” when obtained during a trade or business
- Define digital assets
- Require all brokers to report based on any digital assets transferred to their customers or other non-brokers to IRS
- Apply the cost-basis-reporting regime for securities on digital assets.
What Does This mean?
First, the government seeks to raise more tax revenue through tighter rules on all crypto transactions. Hence, this is why the passed bill insists on reporting all transactions on cryptocurrency. However, crypto advocates contended that the legal language in taxation, which necessitates digital asset brokers to report on all crypto trading gains, is vague or too broad. However, amendments are now underway to narrow the scope.
Under IRC Section 60501, all persons involved in a business or trade have to report to the IRS via Form 8300, a Report of Cash Payments over $10,000. The bill defines digital assets broadly; thus, this requirement encompasses all digital assets besides cryptocurrency. Companies contemplating whether to accept cryptocurrency as a form of payment ought to consider this potentially cumbersome reporting requirement.
Can Cryptocurrency be Called Cash or a Cash Equivalent?
Cash typically comprises demand deposits and cash on hand. Currency is generally considered as cash. The term “cryptocurrency” may suggest that it is a currency. However, this doesn’t mean it is automatically cash for accounting purposes.
Cash is mainly used as an exchange medium – in the buying and selling of goods and services. Some cryptocurrencies are used as an exchange medium, which is one of the primary purposes behind Bitcoin and other cryptocurrencies.
However, cryptos embody a limited medium of exchange, unlike traditional fiat currencies. Partly, this may be because, unlike well-established currencies such as the USD or CAD, they are neither backed by the central banks nor recognized as legal tenders in many jurisdictions. Additionally, some large financial institutions in the US and Canada have banned buying cryptocurrencies through their credit card platforms. One of these institutions cited high risk and volatility as the primary factors behind their decision.
A cash equivalent is defined as a short-term, highly liquid investment that is readily convertible to specific/known amounts of cash. They are often subject to the negligible risk of change in value. Cryptocurrencies currently do not seem to meet the definition of a cash equivalent. This is because they do not have short-term life, and they often have substantial short-term changes in value.
Moreover, there are usually specific constraints on the liquidity of cryptocurrencies and their conversion to fiat currency in some cases. Thus, it would not be accurate at present to classify cryptocurrency as cash or cash equivalent.
Can Cryptos be Used for Purchasing and Investing like Fiat Currency?
Users can use cryptocurrency to pay for purchases of goods and services. Additionally, investors can use them for investing in some industries globally. In this aspect, they are similar to traditional currencies. However, they lack a physical form. It would help if you remember that while some countries allow cryptos, others hold cryptocurrency transactions as restricted, and others term crypto as illegal.
Crypto VS. Cash
Today, cryptos and cash coexist, with each having unique advantages that are suitable in specific instances. As the crypto revolution continues to take the world by storm, it is good to weigh the advantages and risks of these currencies.
While cryptos are mainly used as a speculative investment opportunity, they have a developing landscape and advantages over other digital payments forms. Although they are not entirely anonymous, cryptos exist in a secure blockchain network protecting a user’s identity. Cash, however, still has an edge in terms of total privacy.
Cash transactions offer more safety from digital theft, and it enables people to budget efficiently. On the other hand, one requires access to an ATM or other in-person transaction locations, which poses a risk of loss, for example, through misplacement.
Cryptocurrencies may be the safest digital payment option at the moment, but it is not likely that they will be completely risk-free. It is also a world locked away from individuals without the know-how to use it or people without a computer or smartphone.
All these data hints that in the foreseeable future, cryptos and cash will continue to coexist with each other. They both have their unique benefits, and consumers will have the freedom to choose either. For now, we cannot outright say that cryptocurrencies are cash or a cash equivalent. They are, however, a viable investment opportunity, but you need to DYOR to avoid losing money.
More unique regulatory, tax, due diligence, and accounting challenges will emerge as cryptocurrencies evolve and mature. With no precise guidelines from the main regulators, industry innovation might get delayed. However, only time will tell how this unpredictable industry will evolve.