For businesses who voluntarily or as required by law (have to) prepare annual accounts, the question arises as to how Bitcoin and other cryptocurrencies (hereinafter collectively referred to as Bitcoin by way of example) need to be disclosed in the annual accounts, consisting of (commercial) balance sheet, profit and loss account and, if applicable, appendices. As far as we are aware, there is still no official statement on this issue from the tax authorities nor a ruling by a tax court, the German Federal Court of Finance or the Federal Court of Justice. Bitcoin on the balance sheet – what to consider?
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Do Bitcoin and other cryptocurrencies need to be entered on the balance sheet?
In light of the fact that Bitcoin are not things or rights but “merely” computing units, one can easily get the impression that Bitcoin does not need to be entered on the balance sheet. However, this view is not held by the majority of people in the available specialist literature, as Bitcoin represents a concrete economic value for the person preparing the balance sheet on the date the balance sheet is prepared, they can be independently valued and are negotiable.
Disclosing the acquired Bitcoin on the balance sheet
For the balance sheet, a distinction must be made as to whether the Bitcoin are permanently used for business operations in which case they would need to be allocated to fixed assets or whether they constitute current assets. Bitcoin constitute current assets if they are intended for short-term sale, consumption, processing or repayment.
A clear majority in the specialist literature is in favour of the following disclosure of Bitcoin on the balance sheet: The Bitcoin allocated to fixed assets constitute intangible assets (Section 266 Para. 2 B. II No. 4 German Commercial Code, HGB).
If the Bitcoin are part of the current assets, they have to be allocated to other assets (Section 266 Para. 2 B. II. No. 4 HGB).
As far as we are aware, the specialist literature does not advocate that Bitcoin is included in the item “cash balance, Central Bank deposits, deposits with credit institutions and cheques” (Section 266 Para. 2 B. IV. HGB). According to reports, the practice is different in other EU member states.
Self-created Bitcoin
Bitcoin produced through mining, which constitute fixed assets (see the previous section above), can be disclosed on the balance sheet as intangible assets (Section 248 Para. 2 HGB).
If the Bitcoin mined by the user constitute current assets (see the previous section above), they must be disclosed in the current assets. The sub-item “finished produce and merchandise” (Section 266 Para. 2 B. I. No. 3 HGB) could be an option for this. If one is of the opinion that produce can only be tangible assets, Bitcoin has to be allocated to other assets.
Subsequent assessment
If the Bitcoin constitute fixed assets, they must be valued at their acquisition cost (production costs if they were mined). Depreciation of the acquisition costs (production costs for mining) can only be applied in case a permanent reduction in value is to be expected (Section 253 Para. 3 HGB).
If the Bitcoin constitute current assets, depreciation is to be applied if the market price on the balance sheet date is lower (Section 253 Para. 4 HGB). In this case, the question arises as to how the market price is determined. The low valuations may not be retained in the following year if the market price has risen (Section 253 Para. 5 HGB). In this case, an appreciation in value must be applied which has an effects on the profit or loss.
Consequences for payment institutions, e-money institutions and institutions within the meaning of the Capital Requirements Regulation on capital adequacy
Payment institutions, e-money institutions and institutions as defined by the CRR (credit institutions and investment firms; Regulation (EU) No. 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No. 646/2012) must hold a certain amount of own capital for supervisory purposes. It follows from Art. 36 Para. 1 Letter b CRR that any intangible assets must be deducted from the core capital. The term “intangible assets” is determined in accordance with the applicable accounting framework and includes goodwill (Art. 4 Para. 115 CRR). For companies domiciled in Germany, the accounting framework of the German Commercial Code (HGB) and the ordinances for the aforementioned institutions apply (RechkredV and RechZahlV).
The specialist literature advocates that Bitcoin constitute intangible assets under accounting law. This means that the abovementioned institutions must back their holdings of cryptocurrencies with own capital. If this cannot be done, the institutions have to assess whether the Bitcoin business or investment can be outsourced. For this, in particular the regulatory requirements and the commercial, accounting and tax consequences must be taken into account.
Excursion: tax balance / determination of profits for tax purposes
If the Bitcoin are produced by the company itself (mining) and constitute fixed assets (see above), the Bitcoin cannot be included in the assessment basis for income, trade and corporation tax (Section 5 Para. 2 German Income Tax Act, EStG). Any self-produced Bitcoin therefore do not increase the taxable profit.
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