insight magazine

The Bitcoin CPA?

There’s opportunity for CPAs in the IRS’ crackdown on cryptocurrencies. By Derrick Lilly | Winter 2017

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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.