Blockchain and Cryptocurrency CPAs – The Evolution of the Profession
The irony of needing accountants who understand digital assets is that blockchains themselves are transaction ledgers with automated record-keeping – a blockchain is a giant checkbook. The technical properties of blockchains mean that 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 industry by automating accounting, bookkeeping and data entry, ultimately forcing accountants to evolve.
Although the industry isn’t quite there yet, today’s complexities of digital asset taxation and reporting are creating a need for a new type of accountant: the crypto-CPA who is adept at working with limited data, being a forensic investigator, understanding new protocols, and apply old frameworks to new technologies while avoiding any regulatory risk.
Crypto adoption – clients are evolving
The adoption of bitcoin and other digital assets continues to grow exponentially despite the bear market of 2022. Chainalysis concluded that as of last October, global adoption had increased by 880%. While emerging markets are a big reason for this, the U.S. leads the world in retail DeFi adoption, suggesting that U.S. investors are hungry for higher-yielding crypto income even within new, high-risk decentralized platforms. This is also bad news for accounting firms as they realize there is little or no guidance for DeFi, be it accounting or tax guidance.
It does not mean that reporting crypto tax is easy when customers only trade on a centralized exchange. Air drops, hard forks and taxpayers with thousands of crypto transactions make the journey of reporting always a challenge. Although crypto taxpayers are still not the majority, at this point most accountants have clients who have invested, but 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 enter the markets as regulatory issues with digital assets are sorted out. Trillions of dollars are predicted to enter the crypto markets once regulations are in place, of which we have seen many efforts this year, starting with the Biden Executive Order to ensure responsible development of digital assets.
Many companies also continue to adopt 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 cryptocurrency accounting and its current treatment under US GAAP, the Financial Accounting Standards Board is expected to issue new rules within the next year. This means that it is only a matter of time before every CPA firm faces most of its clients trading crypto assets.
Cryptocurrency tax is challenging
The biggest challenge today is created by the young people in the industry themselves. Bitcoin has been around since 2009, but our legacy financial systems and regulators are still trying to catch up with the wave of rapid development we’ve seen in the industry. While the IRS has published some guidance, such as its virtual currency FAQ, along with Notice 2014-21, there are many transactions for which we either have no guidance or simply do not fit into any current reporting framework.
The exchanges and protocols have also not had any form of clear reporting requirements until today; as such, many have failed to maintain sufficient data or their systems are not built to provide the correct 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 a nightmare for taxpayers trying to remain compliant. While there are a number of tax solutions to help crypto traders calculate the correct capital gains and income tax, the complexity of the industry leads to different results depending on the tax tool, creating uncertainty about what real crypto tax liabilities might be.
The expectation from taxpayers remains that their accountants will be able to help them maintain compliance. Taxing cryptocurrency itself is not very complicated – it is based on the property tax law. The complexity lies in learning crypto and staying current with a fast moving industry. When your client lacks a hardware wallet, consider participating in an initial coin offering, staking ethereum 2.0, or entering DeFi liquidity pools. You will not only be able to guide them, but also report all of this. This is where accountants today can gain an advantage over those who don’t understand crypto.
Tax professionals who do so will be able to fully serve their clients and as such retain them. Not being able to help clients navigate the cryptocurrency tax today would be like not helping a client with their email 20 years ago. On the other hand, CPAs who do not fully understand crypto run the risk of giving poor 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 will figure it 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, will surely change everything for auditors and tax accountants. Tax accountants will no longer spend hours completing and reviewing tax forms, as tax returns can be completed and verified instantly. Accounting audits can be performed much faster, as transactions can be verified via the blockchain, and smart contracts can automate and speed up 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 initially work with newspapers, magazines and encyclopedias, and this is being upgraded to the internet – that’s the size of the impact we can expect this technology to have on the accountancy industry.
While it remains unclear exactly what roles tomorrow’s accountants will play – perhaps tax services will be based more on tax planning, while auditors will focus on non-financial data from a company, such as ESG metrics – they must seek to evolve to help their customers in navigating the metaverse/Web 3.0 revolution. If they don’t, their customers 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.
Author information
David Canedo, CPA, specializes in the 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.
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