Bitcoin and cryptocurrencies in the financial statements (German Commercial Code (HGB))

More and more companies are accepting Bitcoin as a means of payment for goods and services or acquiring Bitcoin via crypto exchanges in order to use them themselves in the operational process. Other companies consider Bitcoin as a long-term or short-term investment in their business assets. If companies are required to prepare annual financial statements in accordance with § 242 HGB, this will increasingly lead to issues concerning the commercial accounting of Bitcoin or crypto currencies.

Inclusion of Bitcoin in the financial statements (HGB)

The capitalization of Bitcoin as an asset requires independent utilization, e.g. through sale or transfer of use to third parties, as well as independent valuation (abstract capitalization). Bitcoins can be traded through crypto exchanges, i.e. there is always the possibility to sell Bitcoins against fiat currency (USD, EUR). Since there are no legal prohibitions on capitalization and capitalization options (concrete capitalization), the capitalization of Bitcoin as an asset is mandatory in the annual financial statements.

Valuation of Bitcoin in the financial statements - initial evaluation

Valuation of Bitcoin in the case of acquisition via a crypto exchange

The functionality of crypto exchanges is similar to stock exchanges: prices are based on supply and demand and are available in a variety of currency pairs, such as Bitcoin - EUR, Bitcoin - USD. If a company buys bitcoin against fiat currency, this qualifies as a purchase operation. The acquisition costs are determined in accordance with § 255 (1) HGB. The purchase operation is principally profit-neutral, and profit realization is regularly excluded.

Valuation of Bitcoin with acceptance as a means of payment for goods and services

Debt is a formative factor for a sales contract, the fulfillment of the contract is regularly made through cash payment (§ 433 (2) German Civil Code (BGB)). Although Bitcoin has a monetary function (means of exchange, calculation unit, value retention function - disputed due to the sometimes strong price fluctuations), it is neither recognized by the state nor generally accepted as a means of payment.

The German Federal Financial Supervisory Authority (BaFin) has legally certified Bitcoins as financial instrument in the form of units of account in accordance with § 1 (11) sentence 1 of the German Banking Act (KWG). Accordingly, Bitcoin is to be defined as units that are comparable to foreign currencies, but are not considered as legal tender. They are therefore neither foreign exchange nor notes and coins. Due to the circumstance that no issuer exists, Bitcoin is also no e-money in terms of the Payment Services Supervision Act (ZAG).

Since there is no legal obligation to accept Bitcoin, the seller can decide whether to accept Bitcoin in return for the sale of goods or services. In terms of accounting, this means that an exchange takes place. The service provided for the purchase of the goods or services does not consist of a cash payment, but of the delivery of an asset (bitcoin). The acquisition cost of the bitcoin obtained by means of exchange, measured according to the time value of the delivered goods or services must however not exceed the time value of the received bitcoin. 

Disclosure of Bitcoin in the financial statements

A company holding Bitcoin in its portfolio (acquisition via a crypto exchange, acceptance as a means of payment), may disclose it in its annual financial statements either under fixed assets as acquired intangible assets (§ 266 (2) A. I. No. 2 HGB), or under current assets as other receivables (§ 266 (2) B. II. No. 4 HGB). It makes sense to show Bitcoin in liquid funds. However, the characteristic of Bitcoin as a digital good as well as its non-recognition as legal tender is opposed to this. Also, the disclosure under financial assets (financial investments, securities) does not seem appropriate, as Bitcoin does not represent any rights and obligations in any other asset, liability or company.

Valuation of Bitcoin in the financial statements - subsequent valuation

According to § 253 (1) HGB, assets are to be valued at the cost of acquisition less depreciation. If Bitcoin is allocated to fixed assets, the acquisition costs are to be written down to the lower of cost or market value in the event of a probable permanent impairment (§ 253 (3) HGB). As Bitcoin is not a depreciable fixed asset, scheduled depreciation is not possible.

If Bitcoin is allocated to current assets, write-downs are to be made to the lower of exchange or market price at balance sheet date (§ 253 (4) HGB).

The lower valuations may not be retained if the reasons for the write-downs no longer exist (reversal of impairment pursuant to § 253 (5) HGB).

Excursus in tax law

According to the current state, it can be assumed that the above-mentioned principles of commercial law analogously apply to the income tax treatment. The tax law does not impose recognition bans or restrictions. Also, there are no application letters from the tax authorities as yet.

Conclusion

The illustrated accounting treatment in commercial law of Bitcoin and cryptocurrencies similar in purpose and function, as for example Litecoin or Bitcoin Cash, cannot simply be transferred to other digital currencies. So-called Initial Coin Offerings (ICO) are increasingly issuing cryptocurrencies - also referred to as tokens - whose design, although similar to Bitcoin, may grant to the investor also dividend payments, voting rights or a company share. These additional or different characteristics lead to the question as to whether these cryptocurrencies can be considered as financial instruments. Also, a future recognition of Bitcoin as an official, legal tender could have an impact on the commercial accounting presented above.