Northwind Labs: Twelve Bitcoin, One Contractor, and a Fork

1. March revenue. Ordinary income at fair market value on receipt: 12 × 42,000 = USD 504,000. Basis in each BTC = USD 42,000. Note the timing point: if the performance obligation was not satisfied until later, the receipt is a contract liability and the income date shifts, but the basis is still the value on receipt.

2. Contractor payment. This is a disposal. Amount realised 5 × 28,000 = 140,000; FIFO basis 5 × 42,000 = 210,000; capital loss USD 70,000. The services are deducted at their value, USD 140,000 ordinary deduction (subject to capitalisation if development costs).

The trap: economically Northwind parted with USD 210,000 of value but gets a USD 140,000 ordinary deduction plus a USD 70,000 capital loss, which in many systems cannot be offset against ordinary income. Effective tax relief may be only USD 140,000.

3. Staking. 0.4 × 1,800 = USD 720 ordinary income at receipt, basis USD 1,800 per ETH. Sale of 0.25 ETH: proceeds 600, basis 450, capital gain USD 150. Remaining 0.15 ETH basis USD 270.

4. Fork tokens. With no ascertainable fair market value, the better view is nil income at receipt and nil basis. All proceeds on a future disposal are gain. Document the valuation basis - nil is a position, not an absence of one.

5. Year-end. No mark-to-market under property treatment; no tax event. Total taxable ordinary income: 504,000 + 720 − 140,000 = USD 364,720, plus a USD 70,000 capital loss and USD 150 capital gain.

Revenue (IFRS 15). Measure at the fair value of consideration: USD 504,000, recognised when the performance obligation is satisfied. Specify the price source and the exact timestamp used; the index average is a policy choice.

Holding the crypto. Under current IFRS practice, a cryptoasset held is generally either inventory (IAS 2, at the lower of cost and net realisable value, or fair value less costs to sell for brokers/traders) or an intangible asset (IAS 38, cost model, no amortisation if indefinite life, impairment test at each reporting date). It is not cash, because it is not a medium of exchange or a financial instrument.

The impairment judgement. If Northwind tested for impairment at 15 July, the price fall was an indicator: 12 BTC carrying 504,000 versus recoverable ~336,000, giving an impairment of USD 168,000. The 5 BTC are then derecognised at 28,000 each against consideration of 140,000, producing no gain or loss. If impairment is only tested at year end, the disposal shows a USD 70,000 loss instead. Both are defensible; the policy must be stated and applied consistently.

Staking and fork. Recognise USD 720 of income and an intangible or inventory asset of the same amount. AIR tokens at nil fair value are recognised at nil, or not at all, with disclosure.

Year end. 7 BTC carrying 294,000 versus fair value 385,000: no write-up under the cost model. 0.15 ETH carrying 270 versus 330: likewise.

Divergences to document. Impairment is not a tax deduction event; capital loss character differs; staking income may be treated as revenue or other income; deferred tax may arise on the temporary differences.

Weaknesses

1. No valuation policy. 'Index price' is undefined: which index, which timestamp, which time zone, and how a stale or manipulated price is handled. This is the single most audit-sensitive gap.
2. No wallet register. Without an address-to-entity map and a transaction-level log, FIFO cannot be evidenced and disposals cannot be traced.
3. Everything in 'other income'. Revenue, staking income, and disposal gains have different recognition, disclosure, and tax treatment. Lumping them together obscures all three.
4. No impairment assessment file. No documentation of testing dates, indicators, or recoverable amount.
5. No contractor documentation. Missing invoices, tax forms, and a valuation memo supporting the USD 140,000 deduction.
6. No hard-fork or airdrop policy, so nil-value positions are taken without reasoning.
7. Key management. No evidence of segregation of duties or dual approval over wallets holding material balances.

Remediation before audit

• Write a crypto policy covering valuation source hierarchy, recognition and measurement, impairment testing frequency, and disposal method.
• Build a wallet and transaction register reconciled monthly to the general ledger.
• Re-map the chart of accounts so revenue, other income, and gains sit separately.
• Obtain a valuation memo for the AIR tokens and the staking date prices.
• Add four-eyes approval for any outbound transfer above a defined threshold, with logs retained.

Present the prior-period errors to the auditor before they find them; voluntary correction is treated very differently from discovery.