When working with an accountant who’s new to the crypto world, be sure to clarify these points before moving forward:
1. Spreadsheets won’t cut it.
Human errors make traditional spreadsheet accounting difficult, but they make crypto accounting nearly impossible. Cryptocurrencies fluctuate wildly in value, often within 24-hour periods. Different coins sell for different amounts on different exchanges and in different countries. The more the numbers change, the more the best human accountants struggle to keep pace.
Don’t email your accountant some text about your crypto purchases and assume all is well. Talk to your accountant about the tools available to help manage those assets correctly. In such a volatile market, intelligent automation is far more reliable than manual entry.
2. Cost basis gets tricky.
The cost basis of a crypto asset reflects the price at the time of purchase. But what happens when you trade one coin for another? How do you reconcile your diverse crypto investments with the demands of the IRS?
Track your purchase prices carefully. Keep your accountant updated on every new purchase to ensure you never need to go hunting for information. Sure, you can probably look up the information later, but exchanges have shut down before. Given the uncertainty, it’s better to keep all your tax-relevant numbers in one place.
3. Everything counts as a taxable event.
Purchases and sales are not the only taxable events in crypto. Any time your cryptocurrencies change hands or wallets, regardless of how the event transpires, that action counts as a taxable event. If you forget to include even a short period of crypto activity, you could break a link in a chain that will be difficult to repair.
Work with your accountant to treat crypto like the asset it is. Even if you don’t make or lose money, your future crypto movements will change the value of your holdings. Draw a complete line between purchase and ultimate sale (or indefinite holding place) to keep the tax man happy and your records clean.
4. Volatility requires vigilance.
With so much uncertainty in crypto, your accountant must understand that nothing lasts forever. Coins come and go, exchanges rise and fall and crypto investors sit right in the middle of all of it. You knew your crypto investments would be defined by market anarchy, but your accountant might not understand just how much freedom (and how little regulatory oversight) crypto markets operate with.
As you ride the bullet train of crypto, make sure your accountant knows that the ride will continue to move quickly for the foreseeable future. That doesn’t just apply to crypto’s volatile prices, either. Regulatory changes could upend the crypto market in an instant, and major breaches still pose threats to investors of all sizes. Stay vigilant to protect and track your crypto assets.
5. Banks and crypto don’t always play nice.
Big banks still control most of the world’s money, and they haven’t really figured out what to do about crypto. Many crypto enthusiasts would say that’s the point of decentralized currency — no single entity controls it. But for now, early adopters and their accountants need to understand the limitations of what banks will or will not do regarding crypto assets.
Crypto and banks will ultimately need one another to survive. Coins deserve inclusion on the world’s financial stage, while banks need to keep pace with consumer demands if they want to remain in their positions of power. Until the two sides find a long-term compromise, ensure your accountant understands how (and how quickly) you can use your crypto assets in the real world.
6. Cryptocurrency isn’t technically money (yet).
According to the IRS, cryptocurrency is property, not money. Basic property concepts like capital gains and losses apply, as do the rules governing short-term versus long-term capital gains. This is true in all situations, even when coins are traded for other coins. So, CPAs need to be careful about how they track the value of digital property.
If you mine cryptocurrency, that operation counts as a business. You can deduct the expenses you incur for the mining operation, but the crypto you acquire counts as business income in the form of property with a value set at the time you acquire it. It’s a tricky operation to track, but it's a lucrative one for people who play by the rules.
The best crypto accountants in the world understand that they always have more to learn. Whether your CPA is an old hand or fresh to the crypto scene, keep in close contact to protect the value of your assets, comply with evolving regulations and make the most of this exciting new opportunity.
