Tuesday, April 23, 2024

Are Cryptocurrencies Classified as Financial Assets

Are Cryptocurrencies Classified as Financial Assets

With the recent rise in popularity of cryptocurrencies, more and more people are considering throwing their hats into the ring. Before you hand over your hard-earned cash to the whims of the crypto market, there are a few things you need to consider. What are cryptocurrencies? Why is the market so volatile? Are cryptocurrencies classified as financial assets?  These are all good questions you should be asking if you’re interested in crypto and luckily for you, we’re here to answer all of them.

What Are Cryptocurrencies?

In theory, cryptocurrencies are digitally based tokens that can be used to purchase goods and services. So, in essence, cryptocurrencies are digital money, but they are not backed by any government or form of a commodity like gold. For the record, most “real” money is based solely on faith since the abolition of the gold standard but that’s a rant for another time. 

Why is the Market So Unstable?

Cryptocurrencies are supposed to act as a form of digital money but, at the moment, most people are treating them like stocks. People in the know follow popular coins like Bitcoin (BTC) and Ethereum (ETH) with the eyes of a hawk waiting for any fluctuation. The main reason the market is so volatile is because of the intangible nature of crypto and its yet to be seen acceptance as actual money.

In addition to the unstable nature of cryptocurrencies, there are a ton of mixed signals about their acceptance coming from different governments. As of September 7, 2021, Bitcoin will be legal tender in El Salvador, meaning you can buy stuff with it. On the other hand, China has banned all its financial institutions from providing services related to cryptocurrencies period. This legislation has been a big hit to the crypto market and could be seen as one of the major reasons crypto prices have plummeted so far in recent weeks. 

Are Cryptocurrencies Classified as Financial Assets?

Crypto is still in a very grey area when it comes to regulation so, as far as the taxman is concerned, cryptocurrencies are not financial assets. According to the American Institute of Certified Public Accounts, cryptocurrencies can not be classified as assets because they’re not backed by a government and are not technically cash. There is no contractual agreement that crypto is a placeholder for legal tender or a commodity and, because of its intangible nature, can not be classified as inventory on a balance sheet. 

At the moment, the best way to classify cryptocurrency is as an intangible asset with an indefinite life. Most experts believe that this is an inadequate method of reporting crypto holdings because intangible assets are listed at acquisition cost and do not adjust for the price going up. Everyone’s favorite revenue service, the IRS, has very few regulations on how cryptocurrencies are taxed but in 2014 they stated that cryptocurrencies can be taxed depending on how the coins are held as personal, business or, investment assets. 

For now, all of the digital coins that fall under the crypto umbrella can’t be classified as financial assets. The future of cryptocurrencies is still hazy, so it will be interesting to see how it evolves in the future.

Editors Note: If you’re looking for more great reads on this subject, consider reading InvestorTrip.  They have a set of comprehensive articles on buying and selling most major cryptocurrencies.  Dual Income No Kids has a very good article on capital flow and the future of cryptocurrency.

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