Digital currencies are quickly emerging as a powerful tool for innovation and growth in today’s rapidly evolving financial landscape. As your business considers integrating these assets into its investments or balance sheets, navigating the complexities and opportunities they present is crucial.
Whether you’re just starting out or diving deeper into the world of digital assets, this article highlights the essential factors to consider and provides a clear roadmap to help you make confident, informed decisions.
Securing Digital Assets: Custody & Control
Who Holds the Keys?
Managing private keys—the digital equivalent of a vault’s combination—is foundational to securing digital assets. Your businesses must decide whether to manage these keys internally or entrust them to third-party custodians. Each option has unique risks and operational requirements.
- Ensuring transparency: Blockchain’s transparency is an advantage, but tracking digital asset movement demands meticulous attention. Implementing a digital asset roll-forward process can help reconcile balances and maintain clarity across accounts.
- Third-party custodians & SOC reporting: Reviewing system and organization controls (SOC) reports is essential if relying on custodial services. These reports assess custodians’ security and operational effectiveness, ensuring alignment with your risk management framework.
Valuation & Financial Reporting
Understanding Fair Value Standards
Accurate digital asset valuation (ASC 820) is non-negotiable, particularly under fair value standards. Factors like market volatility and the absence of centralized pricing require precise valuation methodologies.
Enhancing Financial Transparency
Clear and comprehensive financial disclosures bolster investor confidence. To comply with regulatory standards, your organization should detail valuation methods, risk assessments, and impairment considerations.
Revenue Recognition & Tax Considerations
Revenue Recognition From Digital Assets
- Transactions in exchange for goods and services: When digital assets are used in exchange for goods or services, these transactions are often treated as barter transactions under tax and accounting guidelines. Be sure to document fair value at the time of the transaction for accurate reporting.
- Staking rewards and mining income: Revenue generated from staking or mining digital assets poses unique challenges in recognition and valuation. Companies must determine when these rewards are considered “earned” and how to reflect them on financial statements.
- Token issuances: For companies issuing their own tokens, recognizing revenue depends on whether tokens are sold, distributed, or issued to stakeholders through SAFE or SAFT agreements or other fundraising events. Detailed disclosure about token allocation and valuation is essential.
- Deferred revenue: If digital assets are received as prepayment for future goods or services, your business must account for deferred revenue and recognize it appropriately as performance obligations are met.
Tax Considerations
- Tax treatment of staking and mining: Rewards earned through staking or mining may be subject to income tax upon receipt, requiring companies to maintain precise records of the fair market value at the time of receipt.
- Capital gains and basis calculation: When digital assets are sold or exchanged, tracking cost basis and fair market value is essential for accurate capital gains reporting. This becomes increasingly complex with frequent transactions or multiple wallets.
- Jurisdictional challenges: Tax treatment for digital asset revenue varies by jurisdiction. Companies operating internationally and in the U.S. must stay abreast of multinational, domestic, and state regulations to ensure compliance.
- Navigating nonmonetary transactions: Revenue from digital asset transactions, especially nonmonetary exchanges, can be complex. Aligning with ASC 606 ensures compliance and proper recognition of revenue streams.
- Staying tax compliant: Tracking realized gains and losses for tax purposes is essential. Recent IRS requirements mandate account-based tracking for tax lots, underscoring the need for robust systems to manage compliance.
Preparing for Policy Changes & Industry Trends
Regulatory Landscape in Transition
As U.S. policy evolves, the digital asset space stands on the brink of unprecedented opportunity. With new policy changes on the horizon, your business has a unique chance to capitalize on a more defined and supportive regulatory framework. While key guidance continues to be refined pertaining to policies, such as the recent rescission of Topic 5.FF under SAB 122, representing a shift in how companies account for obligations to safeguard crypto assets, policymakers are laying the groundwork for managing and reporting digital currencies.
Upcoming developments will likely open doors for greater adoption, innovation, and integration into the mainstream financial system.
Seizing Emerging Opportunities
The institutional adoption of digital assets is reshaping market dynamics. By staying informed of industry trends, your business can position itself as an industry leaders an early adopter to capitalize on new growth avenues in this transformative and rapidly expanding market.
Your Trusted Partner in Digital Assets
At CBIZ, we understand the complexities of integrating digital assets into your business strategy. From custody and valuation to compliance and reporting, our tenured industry specialists are equipped to guide you through every step of the process. Whether you’re exploring digital assets for treasury purposes or seeking to enhance your financial transparency, we’re here to help.
Let CBIZ help you unlock the full potential of digital assets for your business.
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