Cryptocurrency: What’s the fuss?
When you were studying for the CPA exam, did you think cryptocurrencies would be a topic you would have to worry about?
They’re not just a fad anymore. They are something you as an accountant need to be versed in handling.
In 2018, it appeared they might be losing popularity when 10 of the top cryptocurrencies crashed. According to Bit Degree, the cryptocurrencies market grew from $18 billion in January 2017 to $800 billion in January 2018. Shortly after the peak, there was a huge price correction and the market dropped to $254 billion in April 2018.
Regardless if you were able to look into the future, cryptocurrencies are an asset that a lot of accountants need to be able to advise their clients on. Do your clients have cryptocurrencies? Do you know how to account for them correctly? The accounting profession is starting to take these assets seriously, and accounting for cryptocurrencies has become an issue that accountants have to be aware of.
There are many intricacies involved, but first I want to cover the basics.
“Cryptocurrency” is the overall term used to describe the different brands — kind of like how people use “Coke” to describe all soda in certain parts of the U.S. If you aren’t familiar with what a cryptocurrency is, it is defined as “digital or virtual currency that uses cryptography for security.”
There are many types of cryptocurrencies, but the top 10 are as follows:
- Bitcoin (BTC)
- Ethereum (Ether)
- Ripple (XRP)
- Bitcoin Cash (BCH)
- Cardano (ADA)
- Litecoin (LTC)
- Stellar (XLM)
You can find out more about the individual currencies on Bit Degree’s website.
Why is all of this important to you as an accountant?
Personal clients are using cryptocurrencies to buy things from other people and businesses. Businesses like Bloomberg, Microsoft, Overstock.com, Expedia, and many others are accepting payments in Bitcoin. You need to know how to handle the accounting for this.
Accounting Today summarized a recent report from Blox about the top mistakes they see clients and accountants making when it comes to cryptocurrencies. You can read the article here, but their findings are quite intriguing.
Here’s a recap of the biggest mistakes Accounting Today found in the report:
- 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).
- Manual tracking of user or business data or account information (87 percent).
The concerns over cryptocurrencies and how to account for them stems from the IRS recently sending letters to thousands of cryptocurrency users with regard to their tax obligations. That was something many users were not prepared for and not tracking, given the lack of government involvement in the industry. Regardless of the amount of regulation, the IRS is hot on the trial now. There is, however, a gap in talent trained to handle these cases.
There are several ways to handle the valuation of cryptocurrencies, but there are very few guidelines for accountants to follow. Accounting Today quoted Jagruti Solanki, an assurance partner at the accounting firm Aprio who specializes in auditing and blockchain technology. Solanki said the ways in which a day trader would handle the accounting cryptocurrencies are different from how a cryptocurrency mining company would account for their activity. How they would utilize existing accounting systems to be able to account for their activity is also another wrench in how to handle the accounting.
How are you handling cryptocurrencies?