Thanks to globalization, the 2008 financial crisis and the spread of the internet, cryptocurrencies emerged as digital currencies bypassing central banks, and originally intended as mediums of exchange. However, cryptocurrencies and other crypto assets based on blockchain technology are now widely known. Even though crypto-assets and the industry based on them are gaining ground at a rapid pace, neither the European Union nor Hungary's legislative bodies have succeeded in creating the specific legal provisions necessary for the clear accounting and tax treatment of crypto-assets. The aim of this article is to present the basic concepts related to crypto-assets, as well as the main legal, accounting and tax issues related to the taxation of companies producing, acquiring, owning and disposing of crypto-assets, as well as the relevant legislative initiatives and resolutions.
- Introduction
Digitalization and the internet are key drivers of today's changing world. Business relations have become more complex, and the digital economy has emerged alongside the traditional economy. Thanks to technological transformation, cryptocurrencies and other crypto assets based on blockchain technologies have appeared in finance, which are now widely known and are considered by many to be the defining products of the fourth industrial revolution. Because of their growing market demand, their market capitalization, and the price of some of its tokens are reaching unprecedented heights.
The rapid proliferation of crypto assets would require the creation of specific legal provisions necessary for the accounting and tax treatment of these assets with increasing urgency. However, there is not yet uniform and comprehensive regulation on accounting and tax issues for crypto assets. The international and domestic guidelines issued so far do not represent a unified position, and countless criticisms can be formulated against them. The first attempt at EU level to regulate the market in crypto assets was only made in 2023. Before that, apart from anti-money laundering rules, there were no EU rules on the operation of trading platforms for crypto-assets, the exchange of crypto-assets for money or other crypto-assets, or the custody and registration of crypto-assets for clients. At the same time, more and more businesses are conducting more and more operations with crypto assets, which events need to be booked, cryptocurrency activated and valued, and included in the financial statements.
- Basic concepts
The concept most closely related to crypto-assets is blockchain technology, which is a distributed, peer-to-peer database. In this database, there are strict, novel rules for linking data, based on a computer encryption method. Data is recorded and encrypted using a distributed ledger technology, in which the review and authentication of transactions is carried out by "miners" by solving certain mathematical operations, cryptography. Each crypto asset belongs to a blockchain, on which the attached blocks are recorded in the online world in a decentralized manner. The establishment of the new unit, the verification of transactions, their authenticity and subsequent immutability are guaranteed by the encryption and cryptography used, which is considered unbreakable. Encrypted information storage in a distributed database allows you to preserve the anonymity of the transaction, while the blockchain is public and the path of cryptocurrency can be traced in it. Using traditional accounting terminology, we could say that cryptocurrency is a block of data that cannot be duplicated, and blockchain is the ledger where this series of data is "booked".
A crypto asset is a digital representation of value or a right that can be electronically transferred (fungible) and stored using distributed ledger or similar technology. Crypto assets can be broken down into two broad groups, cryptocurrencies and crypto tokens. Cryptocurrencies have their own blockchain, while tokens are built on top of existing blockchains.
The literature often refers to cryptocurrencies as payment tokens. Cryptocurrencies are the most well-known form of crypto assets. Due to their decentralized nature, they are able to fulfil the function of money as a means of payment to a limited extent, with the important feature that transactions related to them do not require the intermediary and supervisory function of certain market participants (e.g. banks). The fundamental difference between cryptocurrencies and currencies issued by the central bank ("fiat money") is that in the case of the latter, widespread trust is ensured by the state monopoly on money issuance and the state guarantee behind traditional currencies. The value of cryptocurrencies is "only" guaranteed by confidence in the unbreakability of the algorithm. While banknote issuance is a state monopoly and the banking system is a strictly regulated market, anyone can invent and "put into circulation" a new cryptocurrency if there is enough confidence in it. At the same time, cryptocurrency issuance is finite, depending on the algorithm, no more than a certain amount of cryptocurrencies can be issued. So far, no cryptocurrency has reached its limit. It is questionable to what extent this will affect mining activity in the future (since the consideration for the work will not be the creation of new crypto assets), and to what extent the finite nature of the asset will affect its fungibility and value.
Tokens can take many forms (asset-referenced tokens, securities tokens, utility tokens, non-fungible tokens) that have different properties, although they are built on top of the same blockchain technology. Today, not only classic crypto tokens exist, but countless other assets are also known. For example, smart contracts may be entered into, which represent special obligations instead of a money substitute. Contrary to their name, smart contracts cannot be considered contracts in the legal sense, but rather involve the automation in virtual space of the obligation underlying the contract. Another possibility of utilizing the technology is the creation of new types of legal entities, decentralized autonomous organizations, which, operating in the online space, perform the function of a trustee, and in return for traditional money, a stake in them in the form of tokens can be acquired.
In 2023, the regulation of crypto assets has taken a big step forward. The FASB (Financial Accounting Standards Board) has adopted an ASU (Accounting Standard Update) proposal, according to which crypto assets covered by ASU are intangible assets with an infinite lifespan, which are based on blockchain technology, the security of transactions is guaranteed by cryptography, and the asset is fungible and transferable. The ownership of crypto assets does not imply any enforceable right or claim, even indirectly, in relation to other products, goods or services.
EU Regulation essentially seeks to regulate the issuance of crypto-assets, offers to the public, admission to trading on crypto-trading platforms and crypto-asset service providers. It defines crypto assets as digital embodiments of value or rights that can be transferred and stored electronically using distributed ledger technology (blockchain) or similar technology. At the same time, it does not exclude the qualification of certain crypto assets as financial instruments (further EU guidance is expected to be published by the end of 2024).
From the above, it can be concluded that crypto assets present a significantly complex picture depending on their type. This complex diversity greatly complicates the task of establishing a uniform, comprehensive, traceable, and transparent set of rules for the accounting and tax classification of crypto assets.
Civil law, however, could serve as a starting point regarding the identification of individual assets, so before discussing the accounting and tax issues of crypto assets, let's briefly review the possible legal classifications.
- Legal classification of crypto assets
The regulation of property and property relations is contained in the Hungarian Civil Code (Civil Code). Property is the thing, the right and the claim. The Civil Code does not define the thing but stipulates that legal entities may acquire ownership of tangible assets, money, securities and natural forces that can be used in the manner of the thing. Since tangible assets means assets in physical forms, while natural resources cannot be linked to crypto assets in any way, we will examine only the rules applicable to money and securities from among the categories of the legal system.
Although the Civil Code refers to money as a thing, from the point of view of law money only means money existing in physical form (banknotes and coins), which serves as legal tender. The forms of money as a means of payment referred to in economic, financial, or other terminology are therefore not money in the legal sense.
Cryptocurrencies are decentralized, meaning they operate without central oversight and cannot serve as legal tender because they do not have an issuer. Accordingly, the concept of cryptocurrency is incompatible with the current concept of money.
The Hungarian rules related to securities can be found in the Civil Code and other legal regulations. In the civil law sense, a security is a unilateral legal declaration that embodies the right contained therein as a paper document or other set of data created, recorded, registered, and transmitted by law (dematerialized securities) in such a way that this right can only be exercised and disposed of by and in possession of the security. Furthermore, securities may only be documents or electronic signs that are classified as securities by law.
The Civil Code defines the concept of securities precisely and sets strict conditions for their classification, which hinders the classification of crypto-assets as securities in the legal sense, as crypto-assets do not have a legal and supervisory license, and generally do not contain a declaration for their recognition as securities, and issuer liability is not guaranteed either.
In addition to things in the sense of civil law, we also examined the concepts named in Hungarian contract law, since in addition to the physical objects that can be the subject of ownership, other things can also form the basis of property value. With regard to the concepts of contract law, an obligation is an obligation to perform a service or, on the other hand, an entitlement requiring the performance of a service. Such a classification could be justified by the fact that cryptocurrency can be used to buy a product, service, and cryptocurrency can be considered a promise of payment without expiry.
Although the concept of marketable law cannot be found in the Civil Code, the Code formulates rules for the transfer of rights and thus marketability. According to the Civil Code, the marketability of a right is ensured if it is not excluded by law or if marketability clearly arises from the nature of the right. With regard to crypto-assets, classification as rights should apply if someone can acquire a specific right to a given crypto-asset. Although there are crypto-assets (e.g. utility tokens) where a given right may entitle you to acquire another right if a condition occurs, most crypto-assets do not fulfil this criterion and therefore their tradable legal nature can be considered less established.
The Civil Code also specifically names the claim as one of the three asset elements (the thing, the right and the claim), it does not contain a rule that would provide a basis for distinguishing these three elements from each other, nor does it formulate specific definitions for them, thus further legal sources and interpretations are necessary to classify crypto assets as claims from a legal point of view.
- Accounting classification of crypto assets
Based on the above analysis, it can be concluded that crypto assets do not fully fit into the system of rights in rem. Although they have the same characteristics as money and securities, they cannot fit into these definitions, as crypto-assets do not have a value-measuring function and therefore cannot be considered money and cannot be treated as securities due to non-compliance with strictly defined conditions. If, due to possible future changes to the rules by the legislators, these classifications were nevertheless acceptable, they would be placed on the balance sheet under cash, financial assets, or securities. If, on the other hand, the arguments in favor of claims were prevailing with regard to the legal classification of crypto assets, then for accounting purposes financial assets or receivables booked as current assets could be considered.
International accounting classification can be supported by IAS (International Accounting Standards) and IFRS (International Financial Reporting Standards). However, there is currently no standard specifically addressing accounting and presentation of cryptocurrencies or other crypto assets in financial statements. In such a case, a company should determine the most appropriate presentation and measurement method (IAS 8) in its accounting policies using the principles set out in the standards and interpretations issued by IFRIC (IFRS Interpretative Committee).
The accounting concept of cash includes cash, bank accounts and cash substitutes. We have already shown the first two that they are not suitable for describing cryptocurrencies. Cash substitutes include bank cards, checks, other electronic money, but electronic money can only be generated against cash, so cryptocurrency cannot be included in this category either. Financial instruments (IAS 32) include, in addition to funds, securities, receivables purchased or received, the right to exchange financial instruments (receivables) and instruments representing equity of other enterprises, meaning that cryptocurrency does not currently fit into this category either. Nevertheless, speculative cryptocurrency trading has many similarities with securities and derivatives in terms of content, so it would be worth thinking about defining cryptocurrency among digital financial instruments, but this would require a change in standards.
The securities concept of the Hungarian Accounting Act uses the securities concept of the Act on Capital Markets and further elaborates on it. A crypto asset may represent a claim in exchange for which its owner expects money or participation, but these entitlements must be legally enforceable in order to be considered financial instruments. The definition of the Hungarian Accounting Act is in line with that of international standards, which defines financial instruments as contractual arrangements, where one party generates a financial asset as a result of the agreement, and the other party has a financial obligation or equity.
IFRIC defines cryptocurrencies as assets that exist in a digital distributed ledger registry in the digital space; they are not issued by a central body; and should not be considered a contract between the cryptocurrency owner and other parties. Given that the interpretation only takes a position on the issues of cryptocurrencies, it becomes necessary to distinguish between the different types of tokens when discussing the types of accounting tools. IFRIC's interpretation systematically lists the types of accounting assets that could be considered as possible classification elements. These are intangible assets, inventories, financial instruments, and cash, but only intangible assets or inventories are recommended to be booked. IFRIC generally classifies cryptocurrencies as inventories, if they have been purchased for sale by the enterprise in accordance with its business. If this criterion is not met, crypto assets should be treated for accounting purposes in accordance with IAS 38 (Intangible Assets).
Since physical appearance is not a prerequisite for determining inventories, there is no theoretical obstacle to classifying cryptocurrencies as inventories, but in this case questions may arise regarding the subsequent valuation. Under IAS 2, inventories are measured at the lower of their book value or net realizable value (selling price — estimated costs of completion and disposal). This assessment would not work for cryptocurrencies, as it would not take into account the high volatility of crypto assets (huge fluctuations in their price and demand). Moreover, mining is increasingly carried out by mining communities, so the use of international standards for accounting for joint activities may also arise.
Intangible assets are non-financial assets that do not have an objectified form but can be identified, held and possessed with a view to subsequent benefit (IAS 38). Based on this, cryptocurrency can meet the definition of intangible assets. The Hungarian Accounting Act defines intangible assets more narrowly: only property rights, intellectual property, capitalized value of establishment-reorganization and experimental development, as well as goodwill are included, meaning that crypto-assets currently do not fit into this category.
The classification of crypto assets as intangible assets may be justified by parallels between mining and the activation of developments. In the case of commercial crypto-asset mining, similarly to development, significant costs (mainly energy costs and depreciation of tangible assets) are incurred. Furthermore, the success of the project is also not guaranteed, since the first successful mining company already links the transaction to the blockchain, so the others do not receive cryptocurrency in exchange for their investment. In the case of capitalization as an intangible good, it would be needed to determine the expected useful life, residual value and depreciation of crypto-assets upon acquisition, but none of these can be understood in the case of crypto-assets.
The last time the Hungarian tax authority issued a non-binding statement on the domestic accounting and corporate tax issues of cryptocurrencies was in 2017, namely in relation to Bitcoin. According to this, Bitcoin embodies a promise of payment that can only be shown as a claim. It has no interest, but if it is converted into money (or used), it will have a return, which can be a gain or a loss. Due to its property and purpose (receivable acquired), it should be booked among other receivables and valued accordingly, since it represents a promise to pay, which can be exchanged for fiat money or used to pay for other goods or services at its current exchange rate, if there is a person or organization willing to accept this promise of payment as a basis of exchange.
However, this resolution is objectionable on a number of points. It is problematic that the treatment of crypto assets as receivables appears only in Hungarian jurisprudence, from which the international accounting position differs. Another problem is that in its statement the tax authority only provides a basis for the classification of a cryptocurrency, therefore its position can only be applied to payment tokens and cannot be interpreted to classify other crypto assets. However, the most significant problem is caused by the fact that the Accounting Act defines the receivable as a promise of payment expressed in monetary terms arising from a fulfilled contract, i.e. it assumes an issuer, performance and maturity, which cannot be identified in relation to cryptocurrency transactions, so the accounting classification of crypto-assets as other receivables would only be clearly allowed by amending the definition of the receivable accordingly.
The position of the tax authority and the IFRIC interpretation follow completely different approaches, and neither serves as a clear solution for the accounting classification of crypto assets. As the starting point for corporate tax is profit before tax, the lack of a position between the different accounting classification options leads to significant uncertainty regarding the taxation of profits of companies acquiring, owning and disposing of crypto assets.
- Taxation of crypto assets
The accounting classification of crypto assets determines the size and date of the income tax liability of enterprises. If crypto assets were recognized in accounting as inventories, or other receivables in light of IFRIC's interpretation, then impairment should be recognized if the book value of the asset is persistently and significantly higher than its market value known at the time of balance sheet preparation. However, an important difference is that Corporate Income Tax Act does not recognize impairment of receivables as an expense in the tax base, i.e. the tax base must be increased by the impairment recognized in accounting, and tax liability arises as a result of the impairment (except in the case of delisting from the books). In the case of inventories, although impairment is recognized as an expense in the tax base, the amount of tax liability when inventories are sold is indirectly dependent on the company's inventory valuation policy, as the method chosen (e.g. average price or FIFO) influences the amount of eligible expense. Finally, if the crypto asset is booked as an intangible asset and has been depreciated while not delisting, the corporate tax base should also be increased by the amount of depreciation.
A valuation question also arises at the time of acquisition of crypto assets, at financial year's end and at the time of balance sheet preparation. If the company acquired the crypto-asset as consideration for a product or service, the transaction should be considered an exchange transaction (since the crypto-asset is not money), therefore the acquisition value will be the market value of the product or service provided in exchange for the crypto-asset in the currency of the bookkeeping. The determination of the market value must be substantiated, and in the case of transactions between related enterprises, transfer pricing documentation and tax base adjustment obligations may also arise. Foreign currency assets and liabilities shall be valued at the financial year's end. If the crypto-asset has been booked as an asset or security, an impairment loss should be recognized on the basis of the information available at the balance sheet preparation date and in the amount of the difference between the book value of the receivable and the expected recoverable amount, if that loss-like difference is persistent and material. With unrealized gains due to the revaluation of financial assets, the taxpayer may reduce its tax base at its discretion, but not with gains on other receivables.
If the crypto asset became the property of the company through mining, it should be recognized as the production of an intangible asset according to IFRIC and as a receivable received without consideration according to the Hungarian tax authority. Following IFRIC's interpretation, cryptocurrencies can be classified as intangible assets if the company intends to hold cryptocurrencies in its books for more than 1 year, i.e. they are acquired or mined for accumulation purposes. In this case, cryptocurrencies entered in the books should be written down over the useful life chosen in the accounting policies, with the result that the costs associated with the acquisition of cryptocurrencies will be charged to profit or loss on a pro rata basis during the financial years in which the useful life is included.
However, the question may arise: what can be considered a useful life in the case of a crypto asset? Is there such a category at all? Depreciation can only be recorded for intellectual property already in use. The question, however, is what constitutes occupancy in the case of a crypto asset? It is also highly doubtful whether the change in the value of an asset follows any predetermined modality. In terms of depreciation, crypto assets, especially cryptocurrency, behave much more like securities. In the case of intangible assets, depreciation according to accounting is accepted by the Corporate Tax Act as a recognized expense, it does not prescribe a depreciation other than accounting depreciation.
If cryptocurrency is produced (mined) by the company, then the costs and expenses incurred should be accounted for according to principles similar to research and development projects. In such cases, if the project fails, the expense (loss) recognized in accounting shall also be treated as a recognized cost for corporate tax purposes when determining the tax base.
If the company follows the classification according to the position of the tax authority, it must activate the crypto asset created as a result of mining as a claim received without consideration in its books. In the case of assets received free of charge, the market value at acquisition is recognized and accrued as other income (deferred income) and released in parallel with the expenses recognized against the asset. For tax purposes, accruals do not require an adjustment to the tax base, so no taxable income arises until the accrual is released. This occurs when, and to the extent that, depreciation (where possible) or impairment is recognized as an expense against the value of the asset. The concept of receivables received without consideration also causes problems when accounting mining costs. First, in this case, it is questionable what economic activity the costs are incurred for and, in light of this, whether they can be deducted as a tax base deduction item. On the other hand, if we are talking about the production of non-intangible assets, then the costs incurred can only be recorded as operating expenses. Therefore, there are parts of the solution proposed by both IFRIC and the tax authority that are not fully in line with economic reality.
- Conclusions
In our article, we tried to summarize the accounting and tax issues of traditional crypto assets based on the international and domestic guidelines published so far. Crypto assets are not, or at least not fully defined, by international directives or domestic legislation, and their accounting classification is not clear either. There is also a mixture of concepts in the literature, which is especially confusing when it comes to cryptocurrencies and tokens.
So far, international legislation has primarily tried to eliminate the deregulation of the market, therefore both American and European efforts have focused on crypto assets that behave like securities. It is considered an accepted position that cryptocurrency is not legal tender and therefore cannot be detected among funds, although there are countries that recognize it as private money. (On November 19, 2018, the Swiss Exchange Commission approved an ETP, the world's first exchange-traded product tracking the price of multiple cryptocurrencies.)
So far, accounting presentation as securities, inventories and intangible assets has emerged among the possible interpretations, however, due to the determination of the asset value and the time at which it is recognized as an expense, different tax implications are associated with different accounting presentations. However, until there is a common understanding, businesses are left to themselves in their efforts to present assets truthfully and faithfully.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
