Cryptocurrency is increasingly accepted by retailers, gaming sites, and in real estate. But it is something of an existential challenge for accountants. The combination of encryption with a lack of central body and authority means that the only way to track transactions is through the blockchain, which is entirely anonymous. Transactions aren’t traceable unless you know where to look — and that’s the point.
Then, you take into consideration the issue of taxes. Accountants already follow a strict but opaque set of rules surrounding the taxation of income and assets. The very nature of cryptocurrency and its underlying system of blockchain make a mockery of these rules, but that hasn’t stopped the IRS from trying its best to milk money from this lucrative trade.
What is a good CPA supposed to do? Because cryptocurrency is only going to get bigger, and your ability to work with Bitcoin will directly reflect your options for taking on high-net-worth clients. Here are some ways that accountants need to get to grips with these new currency trends.
First: Learn the New Rules
Before accountants can develop novel means of dealing with cryptocurrency, accountants who accept clients with crypto holdings need to know the most basic rules of cryptocurrency, at least as they currently stand.
First, the IRS requires those who hold cryptocurrencies (from Bitcoin to Dogecoin) to pay tax on their holdings and earnings. If your client earns cryptocurrency as income, they pay an income tax. If they hold cryptocurrency and it appreciates, it is an asset. Although the IRS rules are still in relatively early stages, it is essential that all CPAs understand that just because it doesn’t appreciate in a traditional bank account doesn’t mean it’s not taxable. (Companies like BitPay also report to the IRS, so it’s getting more difficult to hide.)
Second, you need to learn how the IRS’s rules work against the ethos and practicalities of trading cryptocurrency. It’s not (solely) a matter of cryptocurrency enthusiasts not wanting to pay taxes. The IRS rules genuinely don’t understand some basic concepts of virtual currency, and it has serious tax implications for those affected. As Chief Technical Officer at Casa, Jameson Lopp mentioned on Twitter: it’s one thing to tax assets received via a hard fork. But what if you have no software to spend your assets? What if the asset drops by 90% before you sell or transfer it? What if the asset isn’t trading when you receive it? How do you pay tax on an asset that had no price when you first received it? These are fundamental questions based on vague definitions provided by the IRS, and these issues also mean that careful bookkeeping is more important than ever.
Second: Rely on Solid Bookkeeping
Reliable, well-documented bookkeeping is the primary tool of the trade, and it is the cornerstone of providing accounting services for cryptocurrency.
When a client buys and sells one cryptocurrency, you already have to factor in the cost base, adjusted cost base, gains, losses, and fair market value. Surveys suggest that if you take on a client, they are likely to trade Bitcoin. But what happens when you find a client who also owns Ethereum or Ripple? All the factors above then become layered, and you need solid bookkeeping to find your way out again.
For example, you must calculate the capital gains or losses on the client’s adjusted cost base, which is the average cost for all the virtual currency acquired — from first to last. If you’re working with both Bitcoin and Ethereum, then you need to calculate two adjusted cost bases (one for each coin). All of a sudden, your Microsoft Excel spreadsheet is on fire. Thankfully, there are new accounting tools that could help.
Third: Acquaint Yourself with New Accounting Tools
Perhaps the biggest challenge accountants face is that today’s accounting tools and software don’t necessarily reflect cryptocurrency’s role in today’s accounting practice. Some of that is changing thanks to the Big Four accountancy firms: in March 2019, Ernst & Young launched a “Crypto-Asset Accounting and Tax Tool,” for institutional use (and high-net-worth traders). But individual CPA practices aren’t likely to have access to it — at least for now.
Even still, one of the most important accounting trends in virtual currencies this year has been the development of new financial tools for cryptocurrency users. It has lead to both a growth in traders and also in asset management applications. So while you work with clients who trade in decentralized currency while waiting for fully-functional accountancy software to launch, you need to become familiar with other financial technologies (fintech). While cryptocurrency is in and of itself a form of fintech, there are also fintech apps and ledger platforms that allow accountants and other users to manage their digital assets:
- Exchanges such as Robinhood, which brokers bitcoin trades.
- Asset management tools such as Coinlancer.
A fair number of asset management tools (like Blox) already provide tax advice to their users; though, it may not accurately reflect their tax liabilities. Even still, these tools can help you start to determine profits, losses, and taxable income. They also provide downloadable transaction histories that are easy to export in .csv and sync with your own software. If your clients aren’t already using asset management tools with accounting platforms, then you will want to (1) encourage them to do so and (2) encourage them to use one that works with your systems.
These are just the basic steps you need to follow if you want to work with clients who use cryptocurrency, but it already looks like there will be better help available in the near future. Even if the IRS never fully understands the fundamental elements of cryptocurrency trading, the big accountancy firms want trader’s money enough to develop platforms catered to them.