Accounting for trading in cryptocurrencies

Accounting for cryptocurrency transactions in Bulgaria is still relatively new and complex due to the lack of specific legal regulation. Nevertheless, based on the available clarifications from the National Revenue Agency (NRA) and the application of the international accounting standards, there are some basic principles that businesses and individuals should follow.

Key points in accounting for cryptocurrencies

1. Legal status of cryptocurrencies

In Bulgaria and the European Union, cryptocurrencies are not considered an official currency or means of payment. They are regarded rather as a financial asset (or intangible asset) and are accounted for in this way.

As a result, cryptocurrency transactions must be reported as operations with financial assets.

2. Cryptocurrencies as an intangible asset

According to the International Accounting Standards (IAS) and the International Financial Reporting Standard (IFRS), cryptocurrencies can be accounted for as:

An intangible asset (if held for the purpose of investment).

A trading asset (if the company buys and sells cryptocurrencies for trading purposes).

3. Acquisition of cryptocurrency

Upon acquisition of cryptocurrency, it is accounted for at the purchase value (the cost), including all related expenses such as transaction fees, commissions, etc.

Example of an accounting entry:

Debit: Financial assets (or intangible assets)

Credit: Cash or bank accounts (depending on the method of payment)

4. Sale of cryptocurrency

Upon the sale of cryptocurrency, income is recorded, and the difference between the sale price and the cost represents a profit or loss from the transaction.

If there is a profit:

1. Debit: Cash

Credit: Income from financial assets (or income from trading in assets)

2. Debit: Income from financial assets

Credit: Financial assets

The difference between the sale price and the purchase value is reported as a profit from investments.

If there is a loss:

Debit: Expenses from financial assets (or loss from investments)

Credit: Financial assets (or intangible assets)

Exchange of cryptocurrency

If a cryptocurrency is exchanged for another cryptocurrency, this is considered a transaction and is accounted for on the basis of the current market value of the two currencies at the moment of the exchange.

In this case, again, a profit or loss may arise, depending on the value of the cryptocurrencies at the exchange.

5. Measurement of cryptocurrencies

According to the international standards, cryptocurrencies can be measured using the historical cost method or the fair value method.

Historical cost: Cryptocurrencies are reported at the price at which they were acquired, without revaluations being made until the moment of their sale.

Fair value: Cryptocurrencies are revalued periodically (for example at the end of each financial year) at their current market value. The difference in value may be reported as an unrealized profit or loss in the financial statement.

6. Cryptocurrencies as inventories or intangible assets

Regarding the accounting treatment of cryptocurrencies, there are various hypotheses. According to the IFRS Interpretations Committee of June 2019, if a company trades in cryptocurrencies on a regular basis (as its main object of activity), they may be accounted for as inventories and measured at cost or at the lower of cost and current market value (IAS 2), or as an intangible asset (IAS 38), if the value of the cryptocurrency can be separated from its holder as a countable unit, then sold or transferred, or if the holder cannot separate a fixed number of currency units.

7. Tax treatment of cryptocurrencies

• Tax on profits

For legal entities, the profit from cryptocurrency transactions is subject to corporate tax at a rate of 10%.

The profits are calculated as the difference between the income from sales of cryptocurrencies and the expenses for their acquisition (cost).

• Tax treatment for individuals

For individuals, the profit from the sale of cryptocurrency is subject to tax on total income (10%). Individuals are required to file an annual tax return and to declare these profits.

If a person trades in cryptocurrencies regularly and for trading purposes, they may be required to register as a self-insured person or even as a legal entity (for example an ET or EOOD). For an ET or an individual who is not a registered trader, if the activity with cryptocurrencies can be defined as the main activity, then the tax rate is 15%.

• Value Added Tax (VAT)

In the European Union, including Bulgaria, cryptocurrency transactions are considered exempt from VAT according to the Court of Justice of the European Union (case C-264/14 Hedqvist). This means that the purchase and sale of cryptocurrencies are not subject to VAT, but are included in the turnover for VAT registration upon accumulation of the legally prescribed turnover over the preceding 12 months.

• Examples of accounting entries

Acquisition of bitcoin for BGN 10,000:

Debit: Financial assets (cryptocurrencies) - BGN 10,000

Credit: Bank account - BGN 10,000

Sale of bitcoin for BGN 12,000:

Debit: Bank account - BGN 12,000

Credit: Financial assets - BGN 10,000

Credit: Income from trading in cryptocurrencies (profit) - BGN 2,000

Exchange of 1 bitcoin for 5 ether, at a market value of BGN 10,000 for bitcoin and BGN 2,000 for ether:

Debit: Financial assets (ether) - BGN 10,000

Credit: Financial assets (bitcoin) - BGN 10,000

Accounting for cryptocurrencies requires careful tracking of each transaction, as well as measurement of the cryptocurrencies at various points in time. Due to the constantly changing regulatory and tax landscape, it is advisable to consult a professional accountant or tax advisor who can ensure the correct application of the accounting standards and tax rules.

For a detailed consultation, contact the team of Марилена-Консулт ЕООД.