5.1 Sales and Transfers of Crypto Assets | DART – Deloitte Accounting Research Tool

ASC 350-30 and ASC 350-60 do not provide specific guidance on derecognizing assets within the scope of those subtopics. Therefore, the accounting for the derecognition of crypto assets that meet the definition of an intangible asset should be based on the guidance in the “general” subtopic under ASC 350, specifically that in ASC 350-10-40.

ASC 350-10

40-1 An entity shall account for the derecognition of a nonfinancial asset, including an in substance nonfinancial asset, within the scope of this Topic in accordance with Subtopic 610-20 on gains and losses from the derecognition of nonfinancial assets, unless a scope exception from Subtopic 610-20 applies. For example, the derecognition of a nonfinancial asset in a contract with a customer shall be accounted for in accordance with Topic 606 on revenue from contracts with customers.

40-3 If an entity transfers a nonfinancial asset in accordance with paragraph 350-10-40-1, and the contract does not meet all of the criteria in paragraph 606-10-25-1, the entity shall not derecognize the nonfinancial asset and shall follow the guidance in paragraphs 606-10-25-6 through 25-8 to determine if and when the contract subsequently meets all of the criteria in paragraph 606-10-25-1. Until all of the criteria in paragraph 606-10-25-1 are met, the entity shall continue to do all of the following:

Report the nonfinancial asset in its financial statements
Recognize amortization expense as a period cost for those assets with a finite life
Apply the impairment guidance in Section 350-30-35.

Pending Content (Transition Guidance: ASC 350-60-65-1)

40-3 If an entity transfers a nonfinancial asset in accordance with paragraph 350-10-40-1, and the contract does not meet all of the criteria in paragraph 606-10-25-1, the entity shall not derecognize the nonfinancial asset and shall follow the guidance in paragraphs 606-10-25-6 through 25-8 to determine if and when the contract subsequently meets all of the criteria in paragraph 606-10-25-1. Until all of the criteria in paragraph 606-10-25-1 are met, the entity shall continue to do any of the following, as applicable:

Report the nonfinancial asset in its financial statements
Recognize amortization expense as a period cost for those assets with a finite life
Apply the impairment guidance in Section 350-30-35.
For crypto assets accounted for in accordance with Subtopic 350-60, recognize gains and losses from remeasurement.

Entities may sell their crypto assets for fiat currency or transfer crypto assets to a vendor in exchange for goods or services or for financial assets or ownership interest in a business or joint venture. Entities may also transfer crypto assets in exchange for other crypto assets. It may be more cost-effective to complete such a transfer instead of converting the crypto asset to fiat currency, since the conversion may require additional fees and may take more time to process. Ultimately, an entity will need to assess which GAAP to apply to the sale or transfer of a crypto asset, such as ASC 606, ASC 610-20, ASC 845, or ASC 860. In addition, an entity may lend its digital assets to other entities, resulting in the derecognition of those digital assets upon a transfer of control. See Section 8.2 for more information about crypto asset lending.

If a transfer represents a nonmonetary exchange with a counterparty that is not a customer and is accounted for under ASC 610-20, a scope exception may apply, in which case the entity would apply ASC 845 rather than ASC 610-20. In those circumstances, any gain or loss upon derecognition would typically be presented net, outside of revenue, as a net gain or loss determined by subtracting the cost or subsequent carrying value from the measured consideration.

Connecting the Dots

Entities often sell crypto assets at fair value within their principal market. Because ASU 2023-08 requires entities to subsequently measure crypto assets within its scope at fair value, with gains and losses from remeasurement recorded in net income in each reporting period, sale transactions may result in no margin. In other words, such in-scope crypto assets must be remeasured to fair value until the point at which they are sold, as is consistent with the transfer-of-control guidance in ASC 606; as a result, there may be no margin on the transaction. However, note that ASU 2023-08 requires disclosure of realized gains or losses. See Chapter 6 for more information.

Example 5-1

Company C, which has not early adopted the amendments in ASU 2023-08, sells crypto assets that are not deemed to be part of its normal course of business. Purchasers of crypto assets from C are not determined to be customers under ASC 606.

Company C sells 10 BTC for cash. The fair value of BTC on the date of the sale is $35,000, and the carrying value of each unit of the BTC that C sells is $15,000. Because the sale of BTC is not in the normal course of business, C records the following journal entry, assuming no additional transaction costs were incurred:

Example 5-2

Company D, a software developer and seller that has adopted the amendments in ASU 2023-08, holds crypto assets for investment purposes and plans to sell a portion of its crypto assets to raise additional capital for its business. For simplicity, assume that the transaction does not include any additional fees or costs.

Company D sells 10 BTC for cash. The sales price of each unit of BTC is $35,000, which is also its carrying value. The counterparty in this transaction is considered a customer under ASC 606, and D is deemed to be the principal in the arrangement. Because D must measure the BTC at its fair value, the sale transaction results in no gain. Company D would record the following journal entries:

In addition to the above considerations, many entities facilitate crypto purchases and sales for others. An entity may, for instance, serve as a liquidity provider, operate an exchange that matches buyers and sellers, or operate an exchange in which the entity participates in every side of a transaction. Therefore, an entity should determine whether it is the principal or agent in sales of crypto assets to counterparties that meet the definition of a “customer” in ASC 606. The determination of whether an entity is a principal or an agent will affect the amount of revenue recognized. For example, if an entity determines that it is a principal in an arrangement in which crypto assets are sold, it will recognize revenue at the gross amount to which it is entitled from its customer, with the associated gross expenses recorded as cost of sales. In contrast, if an entity determines that it is acting as an agent in an arrangement in which crypto assets are sold, it will present revenue at the net amount of consideration retained (i.e., no gross expense).

ASC 606 focuses on recognizing revenue as an entity transfers control of a good or service. Therefore, an entity is a principal in a transaction if it controls the specified goods or services before they are transferred to the customer. ASC 606 provides some indicators to help an entity (1) determine whether it is a principal and (2) assess whether it controls the underlying goods or services before they are transferred to the customer. See Chapter 10 of Deloitte’s Roadmap Revenue Recognition for additional principal-versus-agent considerations.

Connecting the Dots

For tax purposes, questions have arisen about whether — when a digital asset is used, exchanged or sold — the resulting gain is ordinary or capital. For example, a merchant might receive a digital asset as payment for a service, which would be ordinary. Revenue would be recognized on the basis of the fair market value of the digital asset received and recorded as ordinary income. Once received, the merchant could retain that asset or convert it to fiat currency. If the digital asset is retained and held for investment purposes or not otherwise used in the business, it may be regarded as a capital asset and result in capital gains or losses when it is used, exchanged, or disposed of. Alternatively, the merchant may use digital assets in the ordinary course of business to pay employees or vendors and even offer the digital assets for sale. In these circumstances, the merchant should carefully analyze whether the subsequent recognition events might generate ordinary income or loss.

From a tax perspective, disposals of digital assets that result in ordinary losses are allowed to be used as deductions against ordinary income or combined with other operating losses with an indefinite carryforward period. By contrast, capital losses cannot be used against ordinary income and can only be used to the extent of capital gains (in the case of corporations). Further, capital loss deferred tax assets (DTAs) are subject to the organization’s normal valuation allowance assessment process. Any ASC 740-10 uncertain tax positions should be carefully considered. Companies are encouraged to discuss these considerations with their tax advisers.