The irony of needing accountants savvy with digital assets is that blockchains are themselves ledgers of transactions with automated records — a blockchain is a giant check register. The technical characteristics of blockchains mean that data can never be deleted, only added or read, while transactions and balances can be verified instantly with 100% certainty by the protocols themselves. Because of this, blockchains can disrupt the accounting and tax industries by automating bookkeeping, bookkeeping, and data entry, eventually forcing accountants to evolve.
While the industry isn’t quite there yet, today’s complexities of taxing and reporting digital assets are creating a need for a new breed of accountant: the crypto CPA, who is good at working with limited data, is a forensic investigator, and is new to protocols understands , and the application of old frameworks to new technologies while avoiding any regulatory risk.
Crypto Adoption – Customers Evolve
Adoption of Bitcoin and other digital assets continues to grow exponentially despite the bear market in 2022. Chainalysis concluded that global adoption had increased by 880% as of last October. While emerging markets are a major reason for this, the US is leading the world in retail DeFi adoption, suggesting that US investors are starving for higher-yield crypto revenue even within new high-risk decentralized platforms. This is also bad news for accounting firms when they realize there is little to no guidance on DeFi, be it accounting or tax advice.
That’s not to say crypto tax reporting is easy if customers only trade on one centralized exchange. Air drops, hard forks, and taxpayers with thousands of crypto transactions always make the reporting journey a challenge. Even though taxpayers are still not the majority with crypto, most accountants at this point have clients who have invested, but most are not equipped with the knowledge to help crypto investors with basic accounting services.
While many taxpayers with digital assets today are more likely to be Millennials or Gen Z, many investors and institutions are expected to enter the markets as the regulatory issues surrounding digital assets are resolved. Trillions of dollars are predicted to flow into crypto markets once regulations are in place, of which we have seen many efforts this year, beginning with the Biden Executive Order on Ensuring Responsible Development of Digital Assets.
Many companies continue to use this technology, whether as a Treasury reserve asset like Microstrategy, as a payment system, or for branding purposes like Adidas with their NFTs. And while many issues remain with the accounting for cryptocurrencies and their current treatment under US GAAP, the Financial Accounting Standards Board is expected to release new rules next year. This means that it is only a matter of time before every CPA firm will be faced with most of their clients trading crypto assets.
Cryptocurrency tax is a challenge
The greatest challenge today is being created by the youth of the industry themselves. Bitcoin has been around since 2009, but our legacy financial systems and regulators are still trying to keep up with the wave of rapid development we’ve seen in the industry. While the IRS has released some guidance such as its Virtual Currency FAQs along with the 2014-21 Notice, there are many transactions for which we either do not have guidance or that simply do not fit into a current reporting framework.
The exchanges and protocols have not had any clear reporting obligations to date either; As a result, many have failed to store enough data, or their systems are not designed to provide the right information. A look at the comments received by the OECD on the Crypto Asset Reporting Framework suggests that data requirements are one of the biggest challenges in establishing a reporting framework.
The combination of bad guidance and bad data has created nightmares for taxpayers trying to stay compliant. While there are a variety of tax solutions to help crypto traders calculate the correct capital gains and income taxes, the complexity of the industry results in different outcomes depending on the tax instrument, creating uncertainty as to what the actual crypto tax liability might be.
Taxpayers continue to expect that their accountants should be able to help them comply. The taxation of the cryptocurrency itself is not very complicated – it is based on the Property Tax Act. The complexity lies in learning crypto and staying current with a fast-moving industry. If your client lacks a hardware wallet, consider participating in an initial coin offering, staking Ethereum 2.0, or entering DeFi liquidity pools. You want to be able to not only guide them, but also report on all of this. This is where accountants today can gain an edge over those who don’t understand crypto.
Tax professionals who do this will be able to fully serve their clients and retain them as such. Not being able to help customers with their cryptocurrency taxes today will be like not helping a customer with their email 20 years ago. On the other hand, CPAs who don’t fully understand crypto risk receiving poor tax advice on taxable events that they may be completely unaware of. Even with the best tax software, crypto accounting requires a basic understanding of the industry.
The future of cryptocurrency accounting
We’ll find out eventually, and the challenges of crypto tax preparation and accounting will be a distant memory. When that happens, we will begin to see the true potential of blockchain technology. This technology, along with machine learning and AI, is sure to change everything for accountants and tax advisors. Accountants no longer spend hours filling out and reviewing tax forms because tax returns can be completed and reviewed instantly. Auditing of financial statements could be done much faster as transactions could be verified over the blockchain and smart contracts could automate and speed up many accounting functions such as month-end closing and bookkeeping.
We’ve heard it before: blockchain does for money what the internet did for information. Accountants essentially work with newspapers, magazines and encyclopedias and this is on the verge of the internet shift – this is the magnitude of the impact we can expect this technology to have on the accounting industry.
While it’s still unclear what roles tomorrow’s accountants will play – perhaps tax services are more based on tax planning, while auditors focus on a company’s non-financial data such as ESG metrics – they must try to evolve towards helping their clients, navigate the Metaverse/Web 3.0 revolution. If they don’t, their customers will look elsewhere.
This article does not necessarily represent the opinion of the Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Information about the author
David Canedo, CPA, specializes in digital asset taxation. He is the Head of Tax and Compliance Strategy at Accointing.com, a company providing tracking, consolidation, tax and compliance solutions for crypto investors.
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