The rapid growth and popularity of cryptocurrencies have revolutionized the financial landscape, offering numerous benefits. However, this digital revolution has also brought forth a plethora of cybersecurity challenges that demand rigorous examination from a digital forensic standpoint. As the use of cryptocurrencies gains widespread adoption, accountants must take the following five cybersecurity steps:
- Understand the risks. To advise clients adequately, accountants must have a clear understanding of the cybersecurity risks associated with cryptocurrencies. These risks include cyberattacks on exchanges and wallets, social engineering, email compromises, phishing and fraudulent transfer schemes, to name a few. By understanding the various threats, accountants can help their clients recognize potential risks and implement effective security measures.
- Encourage best practices. Accountants can play an active role in promoting best practices for safe cryptocurrency usage. This includes implementing multifactor authentication, securing wallet management and using strong passphrases. Encouraging clients to keep their software up to date and regularly back up their wallets is also crucial. By recommending these practices, accountants can help clients protect their digital assets from potential attacks and minimize their exposure to cybersecurity risks.
- Be wary of insider threats and social engineering. The human element remains a significant cybersecurity challenge. Insider threats, where employees or trusted individuals misuse their access privileges, can result in data breaches or unauthorized transactions. Social engineering techniques, such as phishing and impersonation, target unsuspecting users and trick them into revealing sensitive information or transferring funds to malicious actors.
- Promote regulatory compliance. Cryptocurrencies operate in a largely unregulated environment, creating challenges for regulatory compliance. As such, it is essential for accountants to ensure their clients comply with relevant laws and regulations, including anti-money laundering (AML) and know your customer (KYC) requirements. By promoting compliance, accountants can help prevent their clients from engaging in illegal activities while safeguarding their reputation and financial assets.
- Stay Informed. The cybersecurity landscape is constantly evolving, with new threats and vulnerabilities emerging regularly. Accountants must stay informed about the latest cybersecurity trends to provide up-to-date guidance to their clients. This can be achieved by partnering with subject matter experts and organizations that offer proactive cybersecurity services and by attending relevant training events to stay informed about industry developments.
More IRS Crackdown
Beyond addressing risk factors and evaluating investment opportunities, accountants, business owners and individuals should be aware that the IRS is actively pursuing compliance from an income tax reporting standpoint and initiating criminal investigations when badges of fraud are present. “The IRS issued Notice 2014-21 defining virtual currency as ‘property’ for federal tax purposes. Depending on how virtual currency is exchanged or sold, there may be capital gains tax due on the disposition or ordinary income to the receiver of virtual currency in a business transaction,” said David Gannaway, principal at Bederson, LLP, and a 20-year veteran of the IRS who currently represents clients in IRS tax controversy matters. “If a business pays their employees with virtual currency, employment taxes should be withheld/paid and Forms W-2s issued. Also, Forms 1099 should be issued to independent contractors if paid with virtual currencies.”
In March 2021, IRS Criminal Investigation (CI) launched Operation Hidden Treasure, an enforcement initiative for criminal tax violations related to cryptocurrency. There have been several prosecutions across the country involving digital assets with more to come as proclaimed by CI Chief James (Jim) Lee recently.
By understanding the risks, promoting best practices, encouraging regulatory compliance, remaining diligent and staying informed, accountants can help their clients navigate the complex world of cryptocurrency safely.