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 …….