Cryptocurrency - Virtual Assets Present a Real-Life Opportunity for Accountants and Tax Professionals
Cryptocurrency is taking the world of finance by firestorm, undergoing explosive growth with no signs of extinguishing. Traversing this uncharted territory is challenging, as slews of unsuspecting taxpayers are in the dark about the tax implications of crypto capital gains. A golden opportunity awaits the enterprising accounting firm willing to take on this emerging new entity.
A Year for the Books
2021 is proving to be a blockbuster year for cryptocurrency. According to Investopedia, there are over 12,000 cryptocurrencies in circulation with financial analysts predicting that the current market value will more than triple by 2030. Still in its infancy stages, cryptocurrency promises to propagate, as an increasing number of institutions are embracing digital assets for investment, operational, and transactional purposes.
Financial entities are steadily working digital currency into their client portfolios. U.S. Bank recently announced a cryptocurrency custody service now available to fund managers, JP Morgan provides their wealth management clients access to cryptocurrency investments, and both Visa and Mastercard partnered up with technology companies to release crypto reward credit cards.
Retailers are also adopting cryptocurrency as a form of payment with AMC Entertainment announcing that theater gift cards may be purchased using dogecoin and other cryptocurrency using a BitPay wallet. More than 15,000 businesses worldwide accept Bitcoin including AT&T, Overstock, Home Depot, and Whole Foods, just to name a few.
Individual cryptocurrency investment is also on the upswing. There is an ever-growing list of celebrities and politicians investing in crypto, and as of May 2021, an estimated 46 million Americans, 17% of the adult population, owns a share of Bitcoin. Although we haven't seen a global mass adoption just yet, you can bank on it - some of your clients already own cryptocurrency, or they will in the very near future.
Web of Tax Confusion
Since the IRS hasn’t been exactly forthcoming on reporting virtual currency holdings and transactions, it’s not uncommon to be an accidental crypto tax evader. Most people are clueless on how to calculate crypto capital gains and losses, and it’s of no help to them that digital currency tax rules are in a perpetual state of flux.
What we can gather is that the IRS categorizes virtual currency as property for tax purposes, which means cryptocurrency is taxed in the same manner as other assets, such as stocks. If an investor sells their cryptocurrency, or exchanges it for another investment, this is considered a "taxable event".
The sudden surge in digital currency activity prompted the IRS to take notice resulting in new measures to ensure taxpayer compliance. For starters, the agency issued subpoenas to centralized crypto exchanges for information on noncompliant taxpayers. The outcome – thousands of IRS “6173 letters” continue to make their way into the mailboxes of virtual currency owners advising them to pay back taxes and file amended returns.
Make no bones about it, the IRS is focused on making sure cryptocurrency owners fully understand and meet their tax obligations.
The ensuing onslaught is spurring the demand for accounting and tax professionals equipped with the right resources and expertise in cryptocurrency taxation.
A Monster Opportunity
It's no surprise that the popularity and tax complexity of cryptocurrency has caught the attention of accountants and tax professionals. Crypto accounting professionals are a small, but quickly growing subset of the accounting industry. With high-net-worth portfolios and corporate players in the mix, opportunities are surmounting for guidance on tax structuring and compliance.
However, a word of caution, cryptocurrency is a beast of a different nature, and conventional accounting practices are inadequate for the unique set of demands and requirements. A few of the common mistakes made by taxpayers include:
- Omission of assets and transactions disclosure
- Missing or inaccurate data
- Miscalculations of capital gains and losses
A general lack of clarity and regulation makes this young and rapidly evolving field all a bit foggy. For now, Accountants and tax professionals rely on the AICPA's practice aid "Accounting and auditing of digital assets", a nonauthoritative guide on how to account for and audit digital assets. The CPA Journal put out additional resources in a recent article, and crypto asset tracking and fund management tools are also on the horizon.
So consider yourself forewarned, crypto is creeping ever so quickly into the world of accounting with specialty websites popping up regularly. And as with any underserved, specialty accounting niche market, the complexity and uniqueness of the work at hand commands a higher fee.
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