Accounting and Taxation of Bitcoins considering the recent ransomeware attack.

Accounting and taxation of Bitcoin transactions

                        The recent ransomware attack has had a severe impact on India. While many of them are aware of such an attack, very few of them are privy to the information that the ransom was demanded to be paid in bitcoins. The reason why hackers chose bitcoins maybe due to the anonymity factor available in bitcoin transactions. Even though all the transactions made through bitcoins are double checked and recorded publicly, there is a level of security available to the bitcoin wallet holder regarding his identity. Here is a brief introduction about bitcoins for those not familiar with how it works.

Introduction to bitcoins

Bitcoin was one the first of its kind, of cryptocurrencies. It does not have a governing body or a physical presence. It is also identified as the first decentralised virtual currency. It is said to be developed by a programmer or group of programmers only known as Satoshi Nakamoto who set up the website bitcoin.org in the early 2009. Soon in Satoshi had left everything behind, and handed over the operations to Gavin Anderson, and other bitcoiners.

To transact in bitcoin, one needs a bitcoin wallet. Then bitcoins can be purchased from various bitcoin exchanges by paying cash or transfer of funds. Bitcoin exchanges work similar to various share exchanges. The value of bitcoin is most volatile.

It follows a blockchain method of public ledger system where each block of transactions which are recorded publicly, refer to the previous block in the chain so that all transactions are recorded strictly and any information in the previous transactions are unalterable. In simple terms, anyone can see any transaction that ever happened using bitcoins, and transactions that have been recorded once cannot be changed. Now a question arises that if nobody governs this currency, then who records it?

Miners are the people who employ complex equipment’s to engage in recording such transactions. They are responsible for record keeping services. They may even do it for a fee but a fee is not compulsory. It just ensures quicker processing. “Proof of work” needs to be added to every block which is processed by the miner. It usually includes a difficult method of recognising a nonce. The difficulty to of finding a nonce is set after considering the number of miners. For going through all that trouble, miners are awarded with 12.5 bitcoins generated per block. Such generated bitcoins are available only to miners. The amount of bitcoins generated and given (currently 12.5) will be reduced by half approximately every four years and by 2140, bitcoin generation will stop completely. With the right resources, anyone can be a miner.

Accounting & taxing

                        IRS in America treats bitcoins as property. While any accounting standard doesn’t specifically deal with treatment of it, general conclusions can be drawn.

Treatment of stock of bitcoin in financial statements: It surely cannot be treated as cash or cash equivalent because RBI has specifically advised against use of virtual currencies including bitcoins stating any person using them would be doing so at his own risk. Even if it has a lot of properties similar to cash, it is not the same in so many terms. So, bitcoins could be treated as current assets. The risk involved in such a treatment would be that since the prices of bitcoins are dramatically fluctuating, a proper valuation as in case of shares or stock would not be easy. Proper and separate disclosure of bitcoins held by an organisation would give a better depiction of accounts.

Treatment in case of expenditure paid in bitcoins: to make expenditure in bitcoins, a company must be authorised to do so by its articles. It must first purchase bitcoins first for which it will be answerable to shareholders. Only under circumstances like the recent ransomware hack a company may justify itself in incurring such expenditure. Also, any expenditure made in bitcoins are questionable by the assessing officer if he does not consider it as business expense. It may go into litigation, and it will be up to the judicial system to decide the authenticity and requirement of the organisation in making such expenditure in bitcoins.

Conclusion: While the idea of a currency that doesn’t have a governing body is a great one, the threats posed by bitcoins has questioned the credibility of such transactions. The only way would be to regulate the sector but that would beat the whole point of transacting in cryptocurrency.

Be advised-The above views are personal and not professional.