3 Reasons to Explore Accounting of Cryptocurrencies
Pat Larsen is the co-founder and CEO of ZenLedger.io, a cryptocurrency tax app. He was an Amazon business manager and M&A investment banker. Larsen holds an MBA from The University of Chicago Booth School of Business. He is also a US Air Force Academy alum and former Navy helicopter mission commander. He is currently based in Seattle.
The cryptocurrency market is converging on more regulatory oversight, separating itself from its early Wild West days. As government agencies begin to take more notice of this new asset class, financial firms who have a thorough understanding and specialization in the emerging market stand to benefit from its profound tax implications and opportunities.
Institutional financial developments, such as the pending Bitcoin futures platform Bakkt, are lending much more credence to the legitimacy of digital assets and their transition further into the mainstream. For certified public accountants (CPA's), the time has come to take notice of the growing cryptocurrencies market and its myriad opportunities.
At ZenLedger, our work on a cryptocurrency-focused tax software platform has provided some unique insights into the broader cryptocurrency market, and what industry participants are seeking from CPA’s as the tax deadline approaches. We’ve learned some valuable lessons from processing more than USD 1 billion in digital assets, and we want to share our insights with you.
What was once a fringe market is now fertile ground for accountants to explore it further. We think these 3 reasons are critical for CPA’s unfamiliar with the cryptocurrency landscape to understand.
1. Crypto Tax software integrating with TurboTax
Compliance with cryptocurrency exchanges has become so complicated that popular exchanges are beginning to offer tax resources directly to their users. Several cryptocurrency exchanges — like Coinbase — offer tax resources for their investors, but they do not go far enough for the average investor. Fortunately, several cryptocurrency-focused solutions have partnered with popular tax services software such as TurboTax, helping to address the complexity of filing cryptocurrency taxes properly.
TurboTax has catered directly to cryptocurrency investors this year, creating an entire section for the digital assets. TurboTax’s entrance into the cryptocurrency ecosystem should serve as an indicator that the industry has matured and it’s time to explore it further. Independent software services that target CPA’s are positioned alongside others (i.e., exchanges like Coinbase) to provide both investors and accountants with a much more seamless process for tax filings.
TurboTax is intuitive enough for most people to file their taxes, but accumulating and curating cryptocurrency transactions into the appropriate documents is where CPA’s can make a lasting and fruitful impact. The further integration of cryptocurrency tax software with legacy systems is likely to continue this trend.
2. More revenue for you
The explosion of a novel crowdfunding method, known as Initial Coin Offerings (ICOs), for cryptocurrencies reached its peak at the end of 2017. Raising more than USD 5.6 billion in 2017 alone, many novice investors in an innovative and largely unregulated market made enormous gains in a short period. Fast forward to today, and investors are grappling with losses from an extended 2018 cryptocurrency bear market that consisted of a precipitous decline in cryptocurrency asset prices.
Cryptocurrency investors are engaged with investments that they do not know how to report to the Internal Revenue Service (IRS) accurately — they need experts and are actively searching for them.
A report by Credit Karma earlier this year highlighted how investors lost nearly USD 1.7 billion collectively in unrealized capital losses following the cryptocurrency bear market, and most of them have no idea how to deduct the unrealized cryptocurrency losses — or plan on doing so. As CPA’s, the opportunity to open a new avenue of income for your business is evident.
The IRS’ guidelines on reporting cryptocurrencies are straightforward for accountants, but noticeably convoluted for many cryptocurrency investors. The amalgamation of different exchanges and avenues for direct income in cryptocurrencies (i.e., goods/services or mining) presents an arduous task for the mainstream.
The market is ripe for accountants to assist investors who, in many instances, are willing to pay very well for services that help them avoid the ire of the IRA. Properly marketing yourself to cryptocurrency audiences can get your foot in the door and on the path to a new stream of revenue.
As the IRS hones in on cryptocurrency investors with blockchain forensics companies, escaping the reach of the agency and trying to dodge taxes is no longer a viable option.
3. Learn more about an emerging asset class
The cryptocurrency sector is underscored by some innovative technologies and unusual approaches towards financial assets. Understanding the basics can give you a headstart on an asset class with a momentum that is not slowing down anytime soon.
There may be fewer niche services that show greater potential for growth than crypto investment, and yet the investment community is still well underserved by compliance professionals — entering this market offers ample opportunity for new client acquisition. That being said, the industry involves numerous moving parts that require significant attention to understand their financial implications.
Persistent technical innovation in an emerging market often brings complex legal and financial challenges. We’ve learned a significant amount about the young cryptocurrency market since we got our start, and we’re still learning and adapting to the ever-evolving industry. If there ever were a time for CPA’s to explore the cryptocurrency market further, it’s now.