Along with being a hub for emerging businesses, the UAE is also positioning itself as a hub for cryptocurrency. Cryptocurrency is no longer a fringe asset, and businesses are increasingly engaging in crypto transactions through investments, trading, or accepting payments.
The question arises on how to treat them while accounting. There is no specific guidance on crypto yet. Businesses typically follow International Financial Reporting Standards (IFRS), which form the basis of financial reporting in the UAE.
What makes Crypto so popular?
Crypto is popular in the UAE as it operates on a blockchain model, which ensures transparency, security, and decentralization. Unlike the traditional currencies, crypto allows peer-to-peer transactions without the need for banks or intermediaries, reducing costs and increasing speed. Its limited supply makes it an attractive hedge against inflation. The blockchain model cannot be altered once transactions are recorded, and this builds trust. The UAE’s growing digital infrastructure and innovation, along with the government’s progressive stance towards digital assets, have fuelled strong interest in crypto.
What are the accounting treatments available for Crypto?
A business may deal with crypto in several ways. They may hold them for trading or for investment. Before accounting, we must determine the nature and intention of holding such crypto so that the appropriate accounting treatment could be implemented.
- Holding Crypto as investment:
The business may hold the crypto as a long-term store of value as a part of their investment. As per IAS 38, an intangible asset is an identifiable non-monetary asset without physical substance. Such an asset is identifiable when it is separable or when it arises from contractual or other legal rights. Expenditure for an intangible item is recognized as an expense unless the item meets the definition of an intangible asset, and it is probable that there will be future economic benefits from the asset; and the cost of the asset can be reliably measured.
Since cryptocurrency held for a longer term satisfies the conditions of an intangible asset, it shall be treated as an intangible asset.
2. Trading in Crypto:
Businesses actively buying and selling crypto can categorize them as inventories. As per IAS 2, an inventory is recognized if it is held for sale in the ordinary course of business. Such inventories are required to be stated at the lower of cost and net realizable value (NRV).
Businesses that actively trade in cryptocurrency—such as crypto exchanges, dealers, or brokers—would classify their holdings as inventory under IAS 2. In this regard, the digital assets are acquired for resale in the ordinary course of business, like any other inventory items. These digital assets are to be initially recorded at cost and subsequently measured at the lower of cost or NRV. This treatment ensures that trading businesses reflect potential losses due to fluctuation in the market price.
What about other standards?
In the absence of law around the treatment of the crypto, several different interpretations could be possible. Other standards that could be used depending on the intention and purpose of the crypto are listed below:
1. Crypto as Cash and Cash Equivalents:
IAS 7 specifies that “cash and cash equivalents” comprise cash on hand and demand deposits, as well as short-term, highly liquid investments that are readily convertible to known amounts of cash and that are subject to an insignificant risk of changes in value. Based on this, crypto does not qualify as cash and cash equivalents due to their nature of highly fluctuating and not readily convertible. Therefore, they cannot be considered as cash and cash equivalents.
2. Crypto as Financial Instruments:
Some argue that crypto could be treated as financial instruments. As per IFRS-9, financial instruments are defined as any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. They represent contractual rights and obligations related to financial assets, liabilities, or equity instruments.
Cryptocurrencies do not represent a contractual right to receive cash or other financial assets. Most cryptos do not meet the strict definition of a financial instrument. Therefore, IFRS-9 is applied only in limited scenarios involving crypto-based derivatives.
3. Crypto as Property, Plant, and Equipment:
IAS 16 defines property, plant, and equipment as tangible assets held by an entity for use in the production or supply of goods or services, for rental to others, or for administrative purposes, and are expected to be used during more than one accounting period.
Crypto, being intangible, does not meet the definition and hence cannot be treated as property, plant, and equipment.
In summary, the classification of crypto depends on the company’s intention and business model. Each scenario must be evaluated in detail to check on the relevant IFRS/IAS to be applied.
Is VAT applicable on Crypto?
In the UAE, any trading, exchanging, converting, holding, or managing of virtual assets is exempted from VAT. This exemption came into force on 15th November 2024, with effect from 1st January 2018.
Crypto mining for business purposes, exchange or wallet fees, and supply of goods or services in exchange for crypto are taxable under VAT laws. On the other hand, crypto mining for personal use is outside the scope of VAT.
What is the treatment of crypto under corporate tax law?
If a business is dealing with crypto, corporate tax applies. Similarly, profits, transaction fees, and mining will form part of the corporate tax regime at 9% if above 375,000 AED. However, trading or investing in crypto personally is not subject to corporate tax.
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