The collapse of TerraUSD (UST) has had a ripple effect among popular stablecoins, leading to some losing their peg temporarily as the market digests the news and scrutinizes the methodologies used by stablecoin issuers. While most of the most popular stablecoins such as Circle’s USDC, MakerDAO’s DAI, and Tether’s USDT rarely fluctuate more than fractions of cents vs the US Dollar, these past few weeks have shown that market prices can swing the stablecoin’s valuations, even as the stablecoin issuers assure holders they can honor all redemptions.
Stablecoins and Crypto Accounting
Stablecoins have emerged as the crypto bedrock of many B2B transactions. Offering users the benefits of using the blockchain rails for speed and transparency (and often lower cost), stablecoins have also mitigated the volatility of traditional crypto assets, giving both investors and users some comfort level in using stablecoins as they would cash.
However, the fluctuations of these last few weeks, even within fractions of cents from the USD provide a small and often overlooked challenge… accounting for the volatility. As more stablecoins undergo scrutiny, a few have recently (albeit temporarily) lost their peg to the US dollar. On May 12th, Tether’s USDT dropped 5% to $0.95 while others like USDC and DAI’s prices hovered above $1.00. Other algorithmic-based stablecoins have seen values decline as they have been swept up in the general market apprehension about their methodologies of holding their peg to a programmatically rebalanced basket of assets.
Tracking Stablecoin Through a Shifting Economy
It may seem like these small price fluctuations don’t amount to much, even if the price bounces back to its peg shortly after a decline. However, these small fluctuations, plus the gas fees in the native token of the chain quickly add complexity to accounting and bookkeeping for stablecoin transactions. It is surprising how many companies, from startups to large corporations alike track their crypto transactions on spreadsheets. However, in a market like this, many don’t realize that these spreadsheets quickly become unwieldy and difficult to maintain. The manual upkeep of tracking prices and properly identifying the nature of the transactions could trigger unwanted and unwarranted tax liabilities if one is miscategorized.
When it comes to accounting, stablecoins– and all cryptocurrencies for that matter– fall into the classification of intangible assets according to US accounting rules and as property for the IRS. Because of these classifications, all crypto transactions’ cost basis must be tracked at the time of acquisition and at the time of disposition in order to calculate gains and losses. What many don’t understand is when cryptocurrencies are used either to buy other cryptocurrencies or even pay a vendor it triggers a taxable event. Depending on how long the crypto is held determines the tax treatment of the assets as long-term gains or losses. If an asset was held for more than a year then it would be taxed at a lower capital gains rate, if it was held for less than a year it would be taxed at the ordinary income rate.
It’s easy to see how crypto-native companies with many transactions can struggle to keep up with all the data points in a single transaction. Using coin pricing aggregators like CoinMarketCap and Koinly can help with acquisition costs, but for businesses, in particular, crypto accounting and tax software solutions have emerged to help with this complexity and can optimize tax savings by utilizing different tax methodologies like LIFO or FIFO or specifically identifying crypto).
Impairment and Its Impact on Your Crypto Balance Sheet
An added complexity of crypto accounting, and often a surprise to small crypto companies’ leadership teams, is the concept of impairment. Impairment can have a lasting impact on a company’s balance sheet long after the market recovers. Because the accounting treatment of digital assets, like crypto, are considered intangible assets (like goodwill), valuations of these assets must be done periodically and adjusted downward (i.e. be impaired) if the market value declines. What most non-accountants don’t know is that there is no provision to subsequently adjust the valuations upward if the value of the crypto asset rebounds. So many companies that hold digital assets in this market may find their accounting teams writing down balances and showing losses that will be permanent fixtures on their balance sheets long after the market recovers.
Moving Forward with Stablecoin in the Current Market
In a market such as the one we are in now, tracking crypto gains/losses as a result of everyday transactions as well as the impairment of assets will quickly make companies’ spreadsheet tracking tools obsolete. Many companies are now moving away from manual spreadsheets and coin tracking tools to more sophisticated crypto ledger systems that are able to track the cost basis and can calculate gains, losses, and impairments across many chains. These tools track both crypto accounting and tax issues and assist companies in understanding and mitigating their tax liabilities and also will be a scalable solution for managing companies’ crypto transactions.
So as we’ve seen with the decline of UST, and the de-pegging of USDT, even stablecoins have volatility,
which adds complexity to the underlying accounting. Recent events have shown that in this tumultuous crypto market, even stablecoins aren’t immune to market dynamics. As the market dynamics continue to emerge for Terra and other cryptocurrency valuations, many companies will need to revisit their accounting tools in order to track their assets and minimize their tax liabilities.
