The irony about needing accountants who understand digital assets is that blockchains themselves are transaction ledgers with automated record-keeping—a blockchain is a giant check register. The technical properties of blockchains means data can never be deleted, only added or read, while transactions and balances can be instantly verified with 100% certainty through the protocols themselves. Because of this, blockchains can disrupt the accounting and tax industries by automating the accounting, bookkeeping, and data entry, and eventually forcing accountants to evolve.
While the industry isn’t quite there yet, today’s complexities of taxation and reporting of digital assets are creating a need for a new breed of accountant: the crypto CPA who is good at working with limited data, being a forensic investigator, understanding new protocols, and applying old frameworks to new technologies while steering clear of any regulatory risk.
Adoption of Crypto—Clients are Evolving
The adoption of bitcoin and other digital assets continues to grow exponentially despite the bear market in 2022. Chainalysis concluded that global adoption as of last October had increased 880%. While emerging markets are a big reason for this, the US leads the world in retail DeFi adoption, suggesting that US investors are hungry for higher yield crypto income even within new high-risk decentralized platforms. This is also bad news for accounting firms when they realize there is little to no guidance for DeFi, whether accounting or tax guidance.
That’s not to say crypto tax reporting is easy when clients only trade on centralized exchange. Air drops, hard forks, and taxpayers with thousands of crypto transactions make the journey of reporting always a challenge. Even though taxpayers with crypto are still not the majority, by this point most accountants have clients that have invested, yet most are not armed with the knowledge to help crypto investors with basic accounting services.
While many taxpayers with digital assets today tend to be millennials or Gen Z, many investors and institutions are expected to come into the markets as the regulatory issues get sorted out with digital assets. Trillions of dollars are predicted to come into the crypto markets once regulations are in place, of which we’ve seen many efforts this year, starting with the Biden Executive Order on Ensuring Responsible Development of Digital Assets.
Many companies are also continuing to adopt this technology, whether as a Treasury reserve asset such as Microstrategy, as a payment system, or for branding purposes such as Adidas with their NFTs. And while many issues remain with cryptocurrency accounting and its current treatment under US GAAP, the Financial Accounting Standards Board is expected to release new rules within the next year. This means that it’s only a matter of time until every CPA firm is faced with most of their clients transacting with crypto assets.
Cryptocurrency Tax Is Challenging
The biggest challenge today is created by the youth of the industry itself. Bitcoin has been around since 2009, but our legacy financial systems and regulators still find themselves attempting to catch up to the wave of rapid development we have seen in the industry. While the IRS has published some guidance such as its FAQs on virtual currencies along with Notice 2014-21, there are many transactions for which we either have no guidance or that just don’t fit within any current reporting framework.
The exchanges and protocols haven’t had any type of clear reporting requirements to this day either; as such, many have failed to keep sufficient data, or their systems aren’t built 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 poor guidance and poor data has created nightmares for taxpayers attempting to remain compliant. While a variety of tax solutions exist to help crypto traders compute the correct capital gains and income tax, the complexities of the industry lead to different results depending on the tax tool, creating uncertainty in what true crypto tax liabilities may be.
The expectation by taxpayers remains that their accountants should be able to help them remain compliant. Taxing cryptocurrency itself is not very complicated—it’s based on property tax law. The complexities lie within learning crypto and staying up to date with a fast-moving industry. When your client is missing 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 to report all of this. This is where accountants today can gain an advantage over those that do not understand crypto.
Tax professionals who do will be able to fully service their clients and, as such, retain them. Being unable to help clients navigate their cryptocurrency taxes today will be like not helping a client with their email 20 years ago. On the other hand, CPAs who don’t fully understand crypto risk providing bad tax advice on taxable events that they may be completely unfamiliar with. Even with the best tax software, crypto accounting requires a basic understanding of the industry.
The Future of Cryptocurrency Accounting
We’ll figure it out eventually, and the challenges of crypto tax preparation and accounting will be a distant memory. When that happens, we’ll start to see the true potential of blockchain technology. This technology, along with machine learning and AI, are certain to change everything for auditors and tax accountants. No longer will tax accountants spend hours completing and reviewing tax forms, as tax returns could be completed and verified instantly. Financial statements’ audits could be performed much faster, as transactions could be verified via the blockchain, and smart contracts could automate and speed many accounting functions, such as monthly closing and bookkeeping.
We’ve heard it before: Blockchain is doing for money what the internet did for information. Accountants basically work with newspapers, magazines, and encyclopedias, and this is about to upgrade to the internet—that’s the magnitude of the impact that we can expect that this technology will have on the accounting industry.
While it’s still unclear exactly what roles the accountants of tomorrow will play—perhaps tax services will be based more on tax planning, while the auditors will focus on non-financial data of a company, such as ESG metrics—they must seek to evolve to help their clients navigate through the metaverse/Web 3.0 revolution. If they don’t, their clients will look elsewhere.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
David Canedo, CPA, specializes in taxation of digital assets. He is the head of tax and compliance strategy at Accointing.com, a company that provides tracking, consolidation, tax and compliance solutions for crypto investors.
We’d love to hear your smart, original take: Write for Us