Tesla's Bitcoin Dump Leaves Accounting Mystery in Its Wake

Tesla Inc. made waves this week when it announced that it had dumped the bulk of its Bitcoin stash. Selling 75% of its cryptocurrency gave the company a one-time cash infusion, Elon Musk’s electric car company said, but the battered value of its remaining Bitcoin also dinged profits.

Exactly how crypto helped and hurt Tesla’s bottom line is difficult to disentangle, however, based on what it told the public on earnings day. Current accounting rules—or lack thereof—play a big role.

“Tesla’s disclosure is really vague and not transparent,” said Vivian Fang, accounting professor at the University of Minnesota’s Carlson School of Management. “It is very difficult to realize exactly what is the realized gain and what is the impairment charge.”

This is what we know, based on the company’s shareholder letter: The sale added $936 million in cash to its balance sheet, but impairments impacted the company’s income. The company’s remaining pot of digital assets as of June 30 was worth $218 million, a reduction of more than one billion dollars from the previous quarter. The company booked a “depreciation, amortization, and impairment” charge of $922 million, but it didn’t break out what’s captured in that figure. The 30-page slide deck, of which nine are pictures, mentions Bitcoin twice.

Listeners to Tesla’s earnings call on Wednesday got a little more color, but not much. Chief Financial Officer Zachary Kirkhorn told analysts that the gain the company realized in selling Bitcoin was offset by an impairment charge, “netting a $106 million cost to the P&L,” referring to its profit and loss statement. Tesla recorded the charge in the expense line item, “restructuring and other,” Kirkhorn said.

The shareholder letter lists restructuring expenses at $142 million, but the company doesn’t spell out what else is in that expense bucket. The shareholder letter doesn’t mention $106 million. Tesla didn’t respond to requests for comment.

Tesla’s Incomplete Information

This dearth of information leaves questions that may or may not get answered when the company files its 10-Q—a document that includes more details than a brief earnings report—in the coming days.

“I’m anxious to see the actual filings—to see if they disclose the date that they sold, the price that they sold at,” said Aaron Jacob, head of accounting solutions at TaxBit, a cryptocurrency software company. “They may not disclose any of that.”

Tesla isn’t compelled to do so. No part of US generally accepted accounting principles spells out how companies must account for cryptocurrency or other digital assets, nor do they mandate the type of information companies must reveal in their footnote disclosures. Businesses follow guidance from the American Institute of CPAs that says those that don’t qualify as investment companies should account for crypto holdings as intangible assets.

This means companies record digital assets on their balance sheets at historical cost, minus drops in value during the period. The upshot is that companies only get to record price dips—never recoveries, if the value rebounds. For volatile digital assets, it almost always means companies have to record impairments, even if they’re only losses on paper.

‘FASB Has No Disclosure Rule’

“Right now, FASB has no disclosure rule, zero,” Fang said. “The only thing we know they need to tell us is the cost of whatever Bitcoin holding they have, and if there is an impairment, they have to recognize the impairment charge.”

The Financial Accounting Standards Board is in the early stages of writing rules to fill the digital asset guidance gap. It has fielded hundreds of requests asking for rules that allow companies to reflect the fair value of their crypto holdings, so they capture not just the lows, but also when crypto values spike.

Accounting impairments drag down earnings for companies that bet big on Bitcoin. Enterprise software maker MicroStrategy Inc., which holds the most Bitcoin of any public company, has had to record millions in losses because of the accounting. It voluntarily discloses a bevy of information about its crypto, including the average purchase price and the coins’ fair value during the quarter, as a supplement to the official accounting.

Tesla in February 2021 announced that it had bought $1.5 billion worth of crypto and that it would accept Bitcoin as payment for cars. Two months later, it sold 10% of its stake, generating $101 million from the sale. CEO Musk has touted the value of Bitcoin and cryptocurrency in general.

“This should not be taken as some verdict on Bitcoin,” Musk told analysts on Wednesday. “It’s just that we were concerned about overall liquidity of the company given the Covid shutdowns in China. ”