Crypto Is Mainstream – How CPAs Can Help Maximize the Opportunities

Crypto is increasingly becoming a mainstream investment, but it still remains a confusing concept for many users and investors. How can CPAs and tax practitioners help their organization and their clients understand what type of crypto is being discussed and the reporting and tax implications of these different cryptoassets?

Every crypto investor and user is different and will be influenced by the collective expertise of those involved. That said, practitioners should keep the following questions and/or factors in mind when trying to help their companies or clients navigate cryptoasset-related questions:

• How was the cryptoasset obtained? This is perhaps the most obvious question, but it is also a point that can easily be overlooked. Outside of the tax reporting obligations that accompany cryptoasset trading, there are other factors to consider. By asking this basic question, the practitioner can better understand the provenance, custody considerations, potential tax obligations, basis, charitable contribution implications and tests or procedures that will need to be conducted over the valuation and reporting of this cryptoasset.
• What does the cryptoasset do? While some practitioners might say that cryptoassets are not good for much of anything, this is a serious question. For example, if the cryptoasset is connected to a real-world asset, it is most likely either a stablecoin or a non-fungible token (NFT). Further digging would reveal if the external asset is an existing currency/commodity (like a stablecoin pegged to the dollar) or virtual real estate/assets (which would indicate an NFT). Every cryptoasset is different and has various components that drive the accounting and financial reporting process.
• Where does the asset appear? This is a question that is both straightforward and complicated at the same time. The general consensus in the profession — in the face of no crypto-specific authoritative guidance — is that cryptoassets should be held and reported as indefinite-lived intangible assets. Setting aside the validity of such a treatment, which does not seem to reflect economic reality nor principles, this also raises the following fact: Generally Accepted Accounting Principles (GAAP) only apply to publicly traded U.S. organizations, with private organizations technically exempt from this consensus. In addition, the AICPA has issued (non-authoritative) information to assist organizations with correctly classifying and reporting various cryptoassets. Stated simply, based on where the cryptoasset appears on the financial statement (inventory, currency equivalent, investment, etc.), practitioners can decipher what the nature of the asset is. 

What Happens Next

After helping clients and organizations understand cryptoassets — whether in an audit, tax or advisory engagement — there are two follow-up questions that practitioners should ask:

• What is the plan? Does the organization or client have a plan for how to deal with the cryptoassets that are received? Will they hold on to the crypto, and if yes, will they be using a hot wallet or cold wallet? Both types of wallets have pros and cons; hot wallets are more convenient but have a higher risk of being hacked, and vice versa for cold wallets. These factors must be assessed continuously by both the client/organization and CPA involved. If, conversely, the plan is to convert crypto receipts instantly into fiat (dollars), what is the process to set aside a tax reserve for the obligations that will result from these conversions?
• Do we have coverage? Insurance is rarely a fun topic to bring up, nor is it as scintillating as following price volatility of certain cryptoassets, but it is absolutely critical for organizations seeking to integrate crypto into operations. Most, if not all, existing insurance policies (even cyber policies) do not have any riders or clauses connected to blockchain or cryptoasset activities, and this could lead to significant exposure if not addressed quickly. Especially as crypto payments become more accessible and convenient and are offered by major payment processors the world over, organizations may end up deeper in the crypto pool than had been planned.

This year is shaping up to be another exciting and dynamic one for the cryptoasset sector, with new and innovative applications entering the marketplace on a continuous basis. As the new applications and use cases develop, however, practitioners are going to have to be able to advise clients and their organizations regarding best practices. While there will be obstacles and challenges when offering crypto advisory services, there are also numerous opportunities for practitioners and firms willing to embrace these developments.

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Sean D. Stein Smith Dr. Sean Stein Smith, CPA, DBA, CMA, CGMA, CFE, is a professor at the City University of New York – Lehman College. He is a member of the NJCPA Board of Trustees, participates on several interest groups. More content by Sean D. Stein Smith: Crypto Accounting: Updates and Predictions – July 2023 What New CPAs Want: Insights and Recommendations from the Field Alternative CPA Firm Structures Gaining Ground Crypto Accounting: Updates and Predictions The 150-Hour Debate: Insights from Accounting Educators Forensic Accounting: The Impact of Crypto and Automation ChatGPT versus CPA Accounting for Digital Assets: Key Considerations for Practitioners Learn more from Sean D. Stein Smith: 12/5/23 - Cybersecurity | ChatGPT for Accountants 1/9/24 - Cybersecurity | Cryptocurrency 1/12/24 - Cryptocurrency Taxation: Trends, Topics and What CPAs Need to Know 1/19/24 - Cryptocurrency Taxation: Trends, Topics and What CPAs Need to Know 1/23/24 - Artificial Intelligence | Crypto 1/25/24 - Nonprofit Interest Group Meeting and Technical Session