The world of cryptocurrency and digital markets is relatively new and complex, making it difficult to account for them on financial statements and tax returns. Accounting, tax, and auditing firms are increasingly finding that cryptocurrencies are affecting their daily operations and records. Given their unfamiliarity, complexity, and growing popularity, it’s imperative for accountants to continuously learn and stay current with the latest information in the realm of cryptocurrencies. Staying informed is crucial, as they can function as investments, currencies, or earnings, with subtle yet impactful distinctions in their use and taxation implications. Here are the five accounting challenges with cryptocurrencies:
GAAP and intangible vs. tangible assets
Cryptocurrency is classified as an intangible asset and recorded at cost as per generally accepted accounting principles (GAAP). However, this classification poses some issues, such as the concept of depreciation, which cannot be applied to cryptocurrency. This is because the depreciated value of cryptocurrency on a company’s balance sheet does not accurately reflect its true financial value, especially when it is held as an investment.
In our digital age, intangible assets like Bitcoin are gaining popularity. What’s noteworthy is that these assets, although abstract, can be exchanged for tangible goods and services like cash and products.
The IRS and convertible virtual currency
Although cryptocurrency is considered an intangible asset according to GAAP, the IRS treats it as convertible virtual currency. Gains made when traded or sold at a profit are taxed.
Foreign currency
Cryptocurrency, especially Bitcoin which is the original crypto, has been established without the control of any single government. Therefore, it does not fall under the definition of a foreign or domestic currency. However, it can still be used globally just like any other foreign currency to purchase goods and services.
Unreliability and lack of regulations
Different countries have varying policies when it comes to recording and reflecting crypto-assets. The International Finance Reporting Standards (IFRS) leave the decision-making process up to the individual, which may lead to poor judgment calls and number manipulation, ultimately distorting the truth. This creates potential risks for financial misrepresentation in regards to crypto-assets.
Throughout its brief history, the cryptocurrency market has been volatile, which creates reliability issues for anything documented on a balance sheet or tax form.
Tax and auditing challenges
Accountants, tax pros, and auditors face challenges due to inadequate cryptocurrency policies.
Tax professionals need to be adept at identifying crucial queries for clients who may omit details about their digital wallet assets, earnings, or transfers, whether intentionally or unintentionally.
Auditors will dedicate increased efforts to pinpoint and evaluate the potential for inaccuracies in cryptocurrency assets on financial records. The inherent anonymity of these assets will pose additional challenges for auditors and tax accountants when detecting misreported crypto-related transactions in financial statements.
As cryptocurrency grows in complexity, accounting, tax, and auditing services have an opportunity to expand their business. More individuals and companies are seeking compliance, advice, and auditing services as they acquire more crypto-assets, make transactions, and gain customers. The complications and ramifications also increase as the number of crypto-assets, transactions, and customers increase.
source: https://ohiocpa.com/news-resources/news/2022/08/08/challenges-accountants-face-with-cryptocurrencies
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