Initial Coin Offerings (ICOs) have become a popular way for companies to raise funds by issuing tokens or cryptocurrencies. However, accounting for the proceeds of an ICO raises complex accounting and tax questions. This article highlights best practices to ensure compliant, optimised management.

Accounting for funds raised: revenue or deferred income?

Under the French Accounting Standards Authority (ANC) regulation, companies may recognise ICO proceeds as revenue. However, it is also acceptable to record deferred income for the portion of services or products that have not yet been delivered.

Beware of accounting manipulation

Some companies may be tempted to use deferred income as an adjustment variable to reduce corporate income tax. This practice is risky and violates accounting and tax principles. Strict rules must be followed to determine whether recognising deferred income is justified.

Conditions for using deferred income

To allocate part of the proceeds to deferred income, several conditions must be met:

• Clear and precise commitments: The company must have explicit commitments toward investors regarding future services or products, defined from the outset.
• Transparent documentation: Commitments must be clearly documented in the whitepaper, token terms and conditions, and general terms of sale.
• Detailed roadmap: A roadmap specifying project milestones, timelines, goals, and allocated resources.

Consequences when commitments are unclear

If these conditions are not fulfilled, the funds raised must be fully recognised as revenue. Failing to do so could be seen as manipulating the accounts to reduce the tax base.

VAT and ICOs: what about deductibility?

Another critical point concerns value-added tax (VAT):

• Project not yet completed: While the underlying project is still underway, the company incurs expenses with suppliers.
• VAT deductibility: The company must determine whether it can deduct VAT on those expenses.

Best practices for compliant accounting

• Total transparency: Ensure that all commitments are clearly defined and accessible to investors.
• Robust documentation: Draft the whitepaper and terms carefully, with input from legal and finance professionals.
• Respect accounting principles: Apply prevailing standards without attempting to manipulate results.
• Consult experts: Work with accountants who specialise in digital assets.

Conclusion

Accounting for ICO proceeds is delicate and demands a rigorous approach. By following best practices and working with competent professionals, you can keep your company compliant while optimising its tax position.