CPAs are accustomed to new technology, changing regulations and other evolutions in the industry, but even the most seasoned accountants may not know much about a rapidly growing asset class: cryptocurrency. While the exchange medium has been around for more than a decade, its use has picked up significantly in recent years.
A recent survey found that 13% of Americans invested in cryptocurrency over a 12-month period between 2020 and 2021. Of those investors, 61% began investing in cryptocurrency in the previous six months. Like it or not, you cannot afford to ignore it anymore.
Cryptocurrency is becoming increasingly popular as a payment method and investment opportunity, which means CPAs will be dealing with this technology more frequently. CPAs must become cryptocurrency experts to protect their clients’ assets and ensure they remain financially strong as they venture into this new territory.
Here are some things you should know about cryptocurrency:
What is cryptocurrency?
Put simply, cryptocurrency is a form of online payment that uses blockchain technology. Cryptocurrencies have varying values depending on the kind, and the values can change constantly. While the currencies potentially can be lucrative, they must be exchanged for traditional currency to use the cash.
Cryptocurrency is a relatively new concept, but it is becoming well-known fast thanks to some big gains in value that some kinds have experienced. Bitcoin and Ethereum are among the most widely-used kinds of cryptocurrency, but there are many to choose from.
What are the benefits?
Cryptocurrency has become popular across industries, and it has many possible benefits for businesses. Some businesses are starting to use cryptocurrency for payroll as employees look to get involved in the new asset.
In addition, cryptocurrency is an enticing investment, as the value of some types of currency have skyrocketed. In just five years’ time, Bitcoin has increased in value from $500 to more than $50,000. Ethereum jumped from $11 to about $4,000 over the same time period. For early adopters, this investment has been extremely profitable.
SOME BUSINESSES ARE STARTING TO USE cryptocurrency for payroll AS EMPLOYEES LOOK TO GET INVOLVED IN THE NEW ASSET.
Accepting cryptocurrency as a form of payment potentially can be lucrative for companies, as it may attract new customers interested in using the asset. One study found that customers who paid with cryptocurrency had purchase amounts twice that of credit card users. Businesses that accept cryptocurrency potentially can make more money over time if the asset increases in value, while cash may decrease in value over time.
What are the risks?
Just as the rapid increase in cryptocurrency value can make an investor’s mouth water, it can make a CPA’s heart sink to their toes. What goes up often comes down, and investing in these assets can be a double-edged sword.
As the currency’s use becomes more widespread, rules and regulations will continue to evolve along with it. It is vital for CPAs to be up to date on financial reporting practices and laws concerning the assets to best serve their clients.
There are plenty of unknowns when it comes to cryptocurrency, especially when it comes to the long-term value of the assets. When compared to other assets, cryptocurrency is relatively new and does not have much history to look back on, and the history that is available can be unnerving.
For example, Bitcoin had a value of $7,200 in December 2019 before catapulting up to $64,000 in April 2020 and falling back down to $37,000 in May 2020. While the currency regained some value, it had another dramatic drop of 20% in a single day in December 2021.
While Bitcoin is a well-publicized example, these spikes and dips can happen with any cryptocurrency. That kind of volatility can present major risks to individuals and businesses who want to invest in these assets. Depending on how the asset is protected, something as simple as a lost password can be costly.
What does this mean for CPAs?
As with any new technology or financial asset, cryptocurrency can provide a host of challenges for CPAs. One difficulty with these assets is determining their classification—an important factor for a business’s balance sheet.
According to the American Institute of CPAs, cryptocurrency cannot be classified as a tangible asset or cash equivalent, and it does not fit into most categories. AICPA classifies cryptocurrency as an intangible asset, which may not always paint an accurate picture on the balance sheet. It can be hard to account for the actual value of cryptocurrency when its valuation can change in a heartbeat.
Cryptocurrency also has tax implications. In 2020, the IRS began asking on tax forms about virtual currency transactions. As the currency’s use becomes more widespread, rules and regulations will continue to evolve along with it. It is vital for CPAs to be up to date on financial reporting practices and laws concerning the assets to best serve their clients.
Cryptocurrency can be a complicated asset for businesses that are interested in using it. CPAs who understand the technology and are experienced in new guidance and laws concerning cryptocurrency can provide valuable insight for clients as they dive into these new waters.
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