What Cryptocurrencies May Teach Us About Accounting and Decision Making
During a recent call with the New York State Society of CPAs’ (NYSSCPA) Digital Assets Committee, we had a fascinating discussion. It makes me think about our role as financial professionals and success in communicating the value of things. Mind you, in today’s highly speculative investment environment, where qualitative and quantitative information and related disclosures have – I hope temporarily – given way to the pump-and-dump (or pump-and-hold) mindset that turns a parody (Shiba Inu, or SHIB) of a parody (Dogecoin, or DOGE) into a 5 billion USD asset (while DOGE is 50 billion USD market cap at the moment), perhaps the fine distinctions I will discuss don’t matter as much.
The discussion – I will call it a debate, or perhaps a cordial argument – was about the difference between purchasing and holding Bitcoin, DOGE or other crypto assets through PayPal or Robinhood and purchasing and holding crypto assets through an exchange, such as Coinbase or Kraken. I saw a huge distinction between the two, as most crypto enthusiasts would – those who frequently quote the initialism “NYKNYC” (not your keys, not your coins) – while my colleagues did not see the distinction. What do you think?
In brief, there is a difference in utility, in risk and in possible benefits from crypto being held custodially and non-custodially. There is a difference in utility between crypto purchased from a custodian that will transfer crypto to an external source and a custodian who requires a sale/conversion back to regional currency. But, although there is a difference in utility, there is no difference in accounting.
As I have written before, under current circumstance, when you purchase crypto assets through Robinhood or PayPal, there are few fees related to buying the investment (although there may be less favorable exchange rates than through an exchange). When you sell, you also have lower fees than an exchange, but once again face exchange rate issues. Exchanges generally charge higher fees coming and going. Upon purchasing the Bitcoin or other asset (I will just use the term Bitcoin through the rest of this entry to mean Bitcoin and other crypto assets), you will have a balance of coins, which have some balance at the moment depending on the market. All good so far. So, if you purchase Bitcoin in Robinhood valued at $10,000 or in Coinbase valued at $10,000, for valuation purposes, it’s the same thing: $10,000 worth of Bitcoin, which will rise and fall with the market. If you sell or exchange it for another coin, you have a basis of $10,000 plus acquisition and selling costs. No difference.
However – at the time of this writing – you cannot withdraw or transfer your Bitcoin from Robinhood or PayPal. You can only sell your holding. In contrast, Bitcoin purchased from Coinbase can be sent to someone else or to another wallet under your control. I call this “real” crypto; once it is in your own wallet, you have control, can see it on the relevant blockchain, can use it in the new decentralized finance (DeFi) environment.
Let’s look at a specific kind of event. On August 1, 2017, Bitcoin went two different ways: if you had 1 BTC on July 31, you potentially had 1 BTC and 1 BCH (Bitcoin Cash) on August 1. I say potentially, because of the nature of “having,” “owning” or “controlling” are different in this space. Back to the NYKNYC from above: if you held the BTC in a non-custodial (not in an exchange or similar custodian) wallet, you had the keys that would unlock both. If you held it in an exchange such as Coinbase, it was their decision to support both sides of the split. And it becomes even more murky in the PayPal/Robinhood situation.
So, the accountants in the room said that, from an accounting point of view, there was no difference in having $10,000 of Bitcoin in Robinhood or having $10,000 of Bitcoin in your own wallet. They are both worth $10,000 (valuation). If you sell it or otherwise use it in a fashion as described by the relevant tax administration, you have basis. But the Bitcoin in Robinhood or PayPal has less flexibility, cannot be used for the same purposes, you may lose the potential benefit of certain adjustments and changes (with technical names like “forks” and “airdrops,” as referenced by the US Internal Revenue Service) and you can’t actually touch the crypto; you cannot send the crypto to anyone else.
An analogy might be a work of art. Let's say you could purchase the Mona Lisa but, to preserve the archetypal masterpiece of the Italian Renaissance, it could never leave its location in the Louvre. You have every right to keep it there or to sell it, but you can never touch it or display it in your living room.
Much like the Mona Lisa, when you buy Bitcoin through PayPal, you have the ability to keep it, tell others about it and sell it. But you cannot use it – you cannot transfer the BTC to another wallet or transfer it to anyone else. Of course, they say the Mona Lisa is "the best known, the most visited, the most written about, the most sung about, and the most parodied work of art in the world." Bitcoin is much like that.
So, from an accounting point of view, although there is a huge difference in the utility of the investment, there is no accounting or disclosure difference.
Does this make sense?
Tax advice from North American revenue agencies:
CRA: https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/compliance/digital-currency/cryptocurrency-guide.html.
IRS: https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions.
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