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As the relatively new cryptocurrency market heats up and cools off (and heats up again), accountants must adapt. Digital assets are still young and evolving, so unique questions and challenges are bound to arise. As an accountant, your flexibility is crucial. Go along to get along (as the old saying goes), and you’re sure to realize the incredible growth possibilities in this new realm.
Cryptocurrency, an alternative payment system, may have initially had its fair share of detractors. However, it’s gained enough traction that it is now talked about everywhere affecting the accounting profession—from podcasts to the IRS.
From its practical uses (sending and receiving payments at lightning speed) to its futuristic applications (hack-proof digital security) within its cutting-edge blockchain technology, alternative currency is growing in popularity and showing no signs of slowing. The market has grown exponentially and currently has over 4,000 different players and is valued at over $2 trillion, with entities of every size dabbling in it.
The cryptocurrency market reached a valuation of over $3 trillion last year, but it has seen its fair share of volatility like many other investments. Investor speculation, public opinion, anticipated regulations, and some attention-grabbing conspiracies have all played a part in the big highs and lows. However, pending regulations will attempt to stabilize pricing, and that security will likely draw more investors into the space.
Adding credibility, more and more large corporations and lenders are becoming interested in implementing cryptocurrency methods to send and receive payments. They’re also adding cryptocurrency to their investment portfolios. Suffice it to say, cryptocurrency is not a passing fad or a soon-to-burst bubble. It’s here to stay, and you can be ready for how it will affect accounting and tax procedures.
As an accountant, you are in a prime position to help your organization or client benefit from crypto use, investments or the application of its technology. Whether it’s investment advice, guidance with implementing crypto as a payment alternative, fraud protection, or tax return preparation, the world of digital currency offers a wide array of options that will require accountants to maximize potential earnings and reduce losses.
Since its inception in 2008, the crypto market has evolved—at first, an anonymous payment system, then an investment strategy and now a tax responsibility. The IRS declared cryptocurrency taxable in 2014 and started counting payments and trades as similar to that of stock transactions. Organizations and clients will need help tracking the values of fractions of digital coins when they are bought, sold, or used as payment.
Knowing the ins and outs of tax law and cryptocurrency will allow you to help identify and minimize tax liabilities. A large part of the puzzle is figuring out how digital assets were acquired and the value at the time of purchase and sale/trade. Currently, the sale or use of crypto is classified as property and triggers a capital gains tax. Money earned (as with miners in the blockchain or someone receiving crypto as payment) is treated as income for tax purposes.
Calculating gains and losses gets complicated, especially when tracking down fractions of a coin. You and your organization or clients should manually document every detail involving cryptocurrency or invest in software that tracks and imports information into tax return documentation to avoid oversights.
As cryptocurrency investing increases, accountants can be ready to help clients with questions concerning minimizing losses and maximizing gains. The current market has seen so much fluctuation in crypto value that some investors feel prompted to buy and sell quickly to maximize profits. The keen accountant knows that this triggers a short-term capital gains tax instead of a long-term capital gains tax rate and can advise clients whether short-term investments are beneficial.
Beyond investing, businesses realize the value of receiving digital currency as a form of payment to facilitate sales. An accountant can help determine if the pros outweigh the cons and assist in an implementation strategy. For example, a business might need help determining whether to adopt crypto-enabled payments or keep crypto off their balance sheets by using a third-party vendor to accept payments. Further, with dollars and cents going to two decimal places but crypto going out to eight places, what new software would be required? There are many issues to consider when accepting crypto payments—risk assessment, strategy, operations, compliance, and corporate treasury. An accountant can help a business create a plan.
Blockchain technology was one major player in cryptocurrency’s rise to fame because it better decentralized and secured data than any preceding technology. Governments and hospitals are now using blockchain systems to prevent data breaches. Accounting systems can employ the same technology to secure customer and payment information.
Automation is a buzzword in the accounting world. Automating routine tasks will shift accounting responsibilities from compliance to consulting. Blockchain technology, brought to the forefront by cryptocurrency, will allow an organization’s accounting procedures to become more efficient. Software utilizing blockchain automation can complete unalterable bookkeeping tasks in real-time.
Once a highly disregarded idea, cryptocurrency proved the naysayers wrong and progressed to unprecedented levels since its first transaction in 2009. It has paved the way for new ideas in peer-to-peer transactions that sidestep banks. The technological implications of the blockchain will lead to further innovations, taking accounting from pencil-pushing tasks to creative consulting.
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