New FASB rules make Bitcoin holdings a goldmine for corporate earnings

Market capitalization seems to have been the dominant driver of stock price performance last year, particularly for companies with significant Bitcoin holdings. Companies such as MicroStrategy (MSTR) and Tesla (TSLA) saw their stock prices move in tandem with Bitcoin’s price appreciation.

This trend has been amplified by the broader risk-on sentiment in equities, where speculative enthusiasm often outweighed fundamental earnings considerations. Investors viewed these companies as proxy Bitcoin investments, valuing them based on the amount of their Bitcoin holdings rather than traditional financial metrics like revenue, profitability, or earnings per share (EPS).

However, this approach had clear limitations under previous accounting rules. Because Bitcoin was treated as an indefinite-lived intangible asset under the generally accepted accounting principles (GAAP), public companies could only recognize losses when Bitcoin’s price declined but were prohibited from recognizing gains until it was sold.

This led to a distortion in financial reporting, where companies holding Bitcoin appeared financially weaker during price downturns while receiving no accounting benefits during bull runs. As a result, earnings reports often fail to reflect the true economic value of Bitcoin on corporate balance sheets.

In December 2023, the Financial Accounting Standards Board (FASB) introduced new rules (ASU 2023-08) that fundamentally change how companies account for Bitcoin and other digital assets.

Under the new framework, Bitcoin will now be measured at fair value each reporting period, with unrealized gains and losses recognized in net income. This removes the asymmetric treatment of crypto under previous accounting standards, allowing companies to report Bitcoin price increases as earnings rather than waiting until a sale occurs.

The change directly impacts how investors will assess these companies, as earnings figures will now reflect Bitcoin’s real-time performance. This also means that Bitcoin-driven earnings fluctuations will be a part of fundamental stock analysis.

For companies with large Bitcoin holdings, quarterly earnings reports will become much more significant in times of market volatility. This could also create new trading patterns where Bitcoin-holding companies experience stock price volatility around earnings announcements like we’ve seen when Tesla announced its fourth-quarter earnings earlier this week.

Key Amendments in ASU 2023-08

Under the new rules, companies must measure Bitcoin and other in-scope digital assets at fair value each reporting period, with changes in value immediately recognized in net income. This is a stark departure from the previous accounting model, where Bitcoin was classified as an indefinite-lived intangible asset.

The previous accounting model required companies to only recognize impairment losses when the asset’s value declined while preventing them from recognizing gains unless the Bitcoin was sold.

This asymmetric treatment created distortions in financial reporting, often leading to understated earnings during bull markets and exaggerated losses during bear markets. By switching to fair value accounting, companies now report the actual market value of their Bitcoin holdings, aligning financial statements more closely with economic reality.

The new standard also mandates that companies present their Bitcoin and crypto asset holdings separately from other intangible assets on their balance sheets. Additionally, gains and losses from fair value remeasurement must be distinctly reported in the income statement rather than being lumped in with other asset adjustments.

This means investors will now see explicit, separate line items for Bitcoin holdings, removing ambiguity and allowing them to analyze earnings fluctuations directly linked to Bitcoin price movements. Separating crypto-related earnings from other business activities will enable analysts to more accurately model a company’s core operating performance versus the impact of Bitcoin price volatility.

Implications for Public Companies Holding BTC

While the new fair value accounting treatment will provide a more accurate financial picture for companies holding Bitcoin, it will also make earnings reports much more unpredictable and volatile.

For a very plastic example of how this volatility would affect a company, we can turn to MicroStrategy. As of Jan. 27, the company holds 471,107 BTC, valued at approximately $49 billion, given Bitcoin’s market price of $104,275 at press time.

This means that a very conservative 5% quarterly increase in Bitcoin’s price to $109,489 would add approximately $2.45 billion to the fair value of its holdings. A 10% price increase to $114,702 would result in a $4.9 billion boost to earnings, while a 10% decline to $93,847 would erase $4.9 billion from net income.

This level of volatility in reported earnings positions MicroStrategy as a high-beta vehicle for Bitcoin exposure, as even modest price swings can lead to multi-billion-dollar changes in its quarterly performance.

This would make MicroStrategy and any other company with significant BTC holdings a high beta play. In financial markets, a beta play refers to an asset or stock that amplifies broader market movements, exhibiting a higher degree of volatility relative to the underlying market or asset it is tied to. For MicroStrategy and others, its stock will act as a leveraged proxy for Bitcoin, with earnings and valuation becoming highly sensitive to Bitcoin’s price fluctuations.

However, this increased earnings volatility comes with potential downsides, particularly concerning the Corporate Alternative Minimum Tax (CAMT). Established under the Inflation Reduction Act of 2022, the CAMT imposes a 15% minimum tax on large corporations’ adjusted financial statement income (AFSI) — specifically those with an average annual AFSI exceeding $1 billion. Notably, AFSI includes unrealized gains from assets like Bitcoin.

Consequently, companies such as MicroStrategy could face substantial tax liabilities based on these unrealized gains, even without actual asset sales. The Treasury Department has provided exemptions for unrealized gains on certain assets, but as of now, Bitcoin and other cryptocurrencies are not included in these exemptions.

To exempt Bitcoin-related unrealized gains from CAMT, Congress or the Treasury Department would need to pass new legislation or issue guidance clarifying that digital assets should not be included in AFSI calculations. There are a few possible paths to achieving this, but the most straightforward and likely one would be for the Treasury Department to issue new regulatory guidance interpreting how CAMT is applied. Treasury could determine that unrealized Bitcoin gains should not be included in AFSI, similar to how unrealized gains on common stock holdings are already excluded.

Fair value accounting fixes a major distortion in how companies report Bitcoin but also opens the door to unintended consequences. With unrealized gains now part of earnings, corporations could face hefty tax bills on profits they haven’t actually realized. Unless regulators step in, Bitcoin’s presence on corporate balance sheets might become a double-edged sword — offering greater financial accuracy while introducing new risks.

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