The Bitcoin CPA?
There’s opportunity for CPAs in the IRS’ crackdown on cryptocurrencies.
By Derrick Lilly |
When Bitcoin debuted in 2009, it became the first
mathematically-backed digital currency, created and held
electronically, independent of any central authority. Bitcoins
aren’t printed like dollars, they’re mined by an open
community of people (anyone can join) who dedicate their
high-powered computers to networks of machines cracking
complex mathematical problems put forth by the Bitcoin
open-source consortium. No one controls Bitcoin other than
a protocol that mathematically limits the creation of Bitcoins
to 21 million units. These units can be divided down to one-hundred-millionth of a Bitcoin, named a “Satoshi” after
Bitcoin founder Satoshi Nakamoto, which allows the
currency to scale to demand and the transactional needs of
its payment network.
Of course, there’s an easier way to acquire Bitcoins—trade
them secondhand via one of the cryptocurrency exchanges
that have popped up around the globe. Investors and
speculators have been piling into Bitcoin and similar
cryptocurrencies in droves, creating vast sums of wealth in
a ballooning industry. Bitcoin’s move has been meteoric,
increasing in value from mere pennies at its debut to over
$11,000 per unit as of Dec. 4, 2017.
Of course, the way Bitcoin and other cryptocurrencies came
into existence creates a lot of confusion and misconceptions.
Since Bitcoins are not issued by a central banking authority
or government, owners are surely anonymous, and there
can’t possibly be any tax implications, right? Wrong.
As Bitcoin and other cryptocurrencies have moved from the
mysterious to the mainstream, governments worldwide are
looking for ways to track and regulate trading in attempt to
stop money launderers, cyber criminals, and other illicit
groups — there are also billions in tax dollars at stake. In
fact, the IRS has been actively trying to track Bitcoin tax
evaders since 2015 and is currently in a legal dispute with
U.S.-based Coinbase over whether or not the Bitcoin
exchange will have to reveal U.S. customer personal
information and transactions dating back to 2013.
For tax reporting purposes, the IRS classifies Bitcoin and
“other virtual currencies” in Notice 2014-21 as property,
meaning owners are legally obliged to report the capital
gains and losses incurred from cryptocurrency holdings
during each calendar year. This sounds simple enough, but
the IRS classification also creates challenges in calculating
the basis in the property, as well as conflicts with Foreign
Account Tax Compliance Act (FACTA) and Foreign Financial
Accounts (FABR) reporting.
So, with the tax man coming, there’s a clear business
opportunity for CPAs who understand cryptocurrencies and
can advise investors and miners — and the businesses
accepting cryptocurrencies for payments — in how to track,
compile, and report their cryptocurrency activities in order
to adhere to the current tax reporting requirements and all
the others yet to come.