Accountants move into cryptocurrency
Accountants are delving into the complexities of digital currencies such as Bitcoin and Ethereum to help their clients keep track of cryptocurrency assets and transactions, as well as the tax consequences, according to a new report.
The survey was conducted by Blox, a crypto accounting platform, polling a group of tax and law professionals about the biggest challenges and mistakes their clients make when it comes to crypto accounting.
The biggest mistakes, according to the survey, were:
- Lacking disclosure of assets and transactions for tax reporting, from both businesses and individual clients (95 percent);
- Missing or inaccurate data from clients (98 percent);
- Miscalculations of capital gain for profits and losses when analyzing transactions without the proper methods (92 percent); and,
- Manual tracking of user or business data or account information (87 percent).
There are advantages and disadvantages in blockchain, according to Blox CEO Alon Muroch. “The advantage is that everything is transparent and open. The disadvantage is the complexity of tracking and understanding the technology and the way it can influence your financial records.”
In asking why respondents got into this niche sector, there were three dominant responses: They discovered a need from existing traditional clients, associates and colleagues; they had a natural interest in blockchain and cryptocurrencies; or they noticed an opportunity after the growing hype in Bitcoin in recent years.
The report comes as the Internal Revenue Service has begun sending warning letters to more than 10,000 cryptocurrency users reminding them of their tax compliance obligations (see IRS sends letters to 10,000+ cryptocurrency users urging them to pay taxes). Many of the names of the users came from a John Doe summons that the IRS used against the popular virtual currency exchange Coinbase to learn the identities of its customers.
“In the past two or three years, especially with the crypto boom in 2017, it really caught a lot of people by surprise and created issues and complexities that are resulting now or over the past year,” said Muroch. “Those kinds of issues surface when you need to go through an audit or to pay your taxes.”
The survey found that 97 percent of the professionals polled noticed a major gap in guidance and CPA support for crypto tax preparation and compliance, offering opportunities to leverage technology to lend a hand.
“From a talent standpoint, clearly the technology and the accounting tools help a lot,” said Jagruti Solanki, an assurance partner at the accounting firm Aprio who specializes in auditing and blockchain technology and was surveyed for the report. “But I feel like all our hands are tied. There are really no accounting regulations or guidelines. I am working with the AICPA on putting out some whitepapers soon on some accounting guidelines, but really it’s been several years since companies have been out there doing digital asset transactions. A [cryptocurrency] mining company would have different accounting implications than a company that is a day trader of digital assets or a hedge fund. Today one of the biggest challenges is taking accounting positions that the company can use and to tweak the technology or the accounting tools based on what they are looking at.”
Among the challenges are valuations and the tracking of gains and losses. “You have multiple methods,” said Solanki. “There’s FIFO, there’s LIFO, there’s specific identification, depending on what the company needs to do from an accounting standpoint. That is going to drive what the tool needs to do. A huge challenge is valuation itself. Outside of the accounting principles, there are a lot of management estimates involved in that. For example, if a company created a digital asset, like a token, and that token can’t be exchanged yet, or it’s not liquid, where do you put the valuation consideration? What level of market do you attach to that token? All of those require a lot of judgment, and it makes it difficult from an accounting standpoint and from a technology standpoint.”