Think the hype over cryptocurrency has reached its fever pitch? Think again—the crypto craze has only just begun.
Businesses are increasingly viewing cryptocurrency as a viable investment. New tokens are gaining steam, and Bitcoin, the OG crypto cash, continues to trade at a frenzied pace. More than 200,000 Bitcoin transactions occur every day, and investors like the Winklevoss twins and even the U.S. government are staking millions on the currency’s future.
But when it comes to the tax, regulatory, and accounting impacts of cryptocurrency, many questions remain unanswered. In 2014, the U.S. government declared that cryptocurrencies are subject to the capital gains tax, and although many other laws and rules have since been enacted, there’s been little in the way of additional concrete legislation.
Businesses investing in cryptocurrency are turning to their accounting firms for help. This has given rise to a new career path for accountants: cryptocurrency consulting.
In a previous article, we explored the topic of blockchain consulting. As blockchain is the underpinning technology that makes cryptocurrency work, there are some similarities between the duties of a blockchain consultant and a cryptocurrency consultant. But in this article, we’ll focus more on the specific accounting and tax issues surrounding cryptocurrency—and how, as a consultant, you’ll be asked to help your clients navigate them.
We’ll try to get to the bottom of two key questions: What does a cryptocurrency consultant do? And, more importantly, should you consider cryptocurrency consulting as a path for your accounting career?
A (very) brief overview of cryptocurrency
We could easily write a 10,000-word missive on the history and current status of cryptocurrency, but we won’t, as you can find all that information any number of other places online (plus we’re deathly afraid of carpal tunnel.) Just for the sake of clarification, however, let’s crash through a quick overview of cryptocurrency.
Cryptocurrency is “a digital asset designed to work as a medium of exchange that uses strong cryptography to secure financial transactions, control the creation of additional units, and verify the transfer of assets.” (Yes, we just quoted Wikipedia. It’s accurate … usually.)
The first known successful cryptocurrency, Bitcoin, was created in 2009 by a person or group of people known only by the pseudonym Satoshi Nakamoto. Bitcoin’s prosperity stemmed mostly from the concurrent creation of blockchain, the structural technology that holds Bitcoin together through a secure and anonymous digital ledger.
In July 2010, one Bitcoin was valued at $0.08. As of this article’s publication, Bitcoin is trading at $3,606 per coin. While Bitcoin’s value initially surged, its price has experienced extreme volatility over the last year. Bitcoin peaked at nearly $20,000 per coin in mid-December 2017 before crashing to less than $13,000 just two weeks later, setting the stage for what became a wild and turbulent 2018 for investors.
Despite the risks, many companies continue to invest in Bitcoin and are optimistic about its outlook.
Along the way, blockchain has opened the door for the creation of new digital tokens outside of Bitcoin. It’s estimated that there are more than 2,500 cryptocurrencies currently in circulation. This stat is a little misleading, however, as it would imply that there are a lot of cryptocurrencies with a significant market presence. In reality, the top 20 cryptocurrencies account for 89% of the total market.
“The cryptocurrency market is still in its infancy,” said Mitchell Kopelman, partner-in-charge of technology and blockchain at Aprio, a global accounting firm based in Atlanta. “I think it will probably be five years before you see the average business using crypto and blockchain. But the development process has been very fast. There’s already been some big winners and losers, and there will be many more as the market evolves.”
This concludes today’s crypto lesson (be sure to do the odd-numbered problems at the end of chapter 3 for your homework). Let’s get back to the purpose of this article—exploring the newly created career path of cryptocurrency consulting.
What does a cryptocurrency consultant do?
The short answer to this question is “a lot.”
A longer answer: As a cryptocurrency consultant, you’ll take on a wide array of duties that will vary from day to day and client to client. No two workdays will be the same. And thanks to the rapidly evolving nature of the cryptocurrency market, your tasks next year may be completely different from the ones you can expect at present.
Regardless of fluctuations and changes, however, all of your work will come back to one central goal: guiding your clients toward successful, compliant cryptocurrency transactions and practices across accounting and tax functions.
In this article, we’ll take a look at four of the most common categories of work today’s cryptocurrency consultants undertake:
- Ensuring regulatory and tax compliance.
- Encouraging and implementing tractable, efficient crypto accounting practices.
- Assisting with initial coin offerings (ICOs)/security token offerings (STOs).
- Protecting clients and the firm from unethical or illegal crypto practices.
Navigating cryptocurrency taxes and regulations
As a cryptocurrency consultant, you’ll be expected to guide clients through the laws, restrictions, and tax implications of mining, trading, and creating cryptocurrencies. Unfortunately, the regulatory status of cryptocurrency remains in limbo, so you may find many of your clients’ questions difficult to answer.
One place to start is with the proposed Cryptocurrency Tax Fairness Act. The law would essentially require the IRS to provide more guidance about the tax status of cryptocurrency transactions. While this legislation has yet to pass—and probably never will in its current form—it at least reveals some of the legislators’ intentions regarding cryptocurrency regulation.
Other rules and restrictions impacting cryptocurrency include:
- Evolving GAAP standards;
- Numerous aspects of the 2017 Tax Cuts and Jobs Act, including the new foreign-derived intangible income (FDII) deduction and global intangible low-taxed income (GILTI);
- Variable interest entity (VIE) rule; and
- ASC 606, Revenue from Contracts with Customers.
To prepare for upcoming changes, ensure compliance with current regulations, and minimize tax costs, a cryptocurrency consultant might help his clients:
- Determine whether the issuance in exchange for cryptocurrencies or fiat currency should be recognized as revenue, liability, or equity.
- Save significant income tax by adjusting fiscal year-end.
- Account for the tax and GAAP consequences of transferring virtual currency to employees and non-employees.
- Carefully review tax and regulatory implications before trading one cryptocurrency for another.
- Determine eligibility for a reduced tax rate when selling tokens to non-U.S. buyers.
- Reduce U.S. effective corporate tax rate with state and federal research and development tax credits.
- Position foreign subsidiaries participating in token sales for U.S. income tax purposes.
“There are unique tax consequences for transactions occurring with tokens,” Kopelman said. “Businesses might be receiving tokens for payment or giving tokens as rewards, and there are complex thoughts around how those transactions should be accounted for. The global nature of the economy makes things even more complicated, as the laws for international cryptocurrency exchange haven’t really been standardized.”
Does cryptocurrency consulting sound like an intriguing career path? Scroll to the bottom of this article to learn more about cryptocurrency consulting and other job opportunities at Aprio.
Accounting for cryptocurrency
On the accounting side, cryptocurrency consultants are expected to help their clients seamlessly incorporate crypto transactions into existing ledgers while creating new processes when necessary.
Some of the accounting duties of a cryptocurrency consultant might include:
- Establishing a recordkeeping system with separate wallets for short-term trading, long-term buy-and-hold positions, and personal spending.
- Implementing approaches to track crypto transactions and calculate realized and unrealized gain/loss.
- Tracking costs through third-party exchanges or wallet services.
- Generating and enforcing a schedule for regularly converting cryptocurrency to dollars.
- Creating a cost-benefit analysis of issuing tokens as a limited liability company versus a C-corporation.
And as the technology evolves, cryptocurrency consultants may also be asked to help transition some accounting tasks onto one or more blockchains.
“Right now, accounting technology is well behind the actual blockchain technology,” Kopelman said. “But before too long, there will likely be a lot of accounting functions that will be able to move to the blockchain.”
Demystifying ICOs and STOs
Initial coin offerings (ICOs) are an increasingly common way businesses are using cryptocurrency. As you know, businesses that need a cash injection (typically startups, but not always) often trade company equity for cash investments, or take the company public and begin selling shares through an initial public offering.
But with an ICO, instead of equity, the business trades tokens for investor money. These tokens usually represent a new cryptocurrency, one that is created by and specific to the company seeking investments.
“In some cases, ICOs are used to essentially pre-sell access to a new product, typically an app,” Kopelman said.
Security token offerings (STOs) are another popular fundraising tool you’ll need to help clients navigate as a cryptocurrency consultant. Like ICOs, STOs exchange digital tokens for investments. But the tokens issued, generally designated as “security tokens,” are subject to numerous federal regulations designed to help legitimize and secure their value.
Security tokens need to “derive their value from an external, tradable asset,” and are thus subject to the same federal regulations as all securities. Many investors view STOs as a safer, more liquidable, more traditional entry point into the crypto market—and this belief is driving rapidly mounting interest, with Nasdaq proclaiming that “2019 will belong to the security token.”
STOs and ICOs are big business, and working as a cryptocurrency consultant will put you at the heart of an exploding new market. Businesses launched 1,257 ICOs in 2018, raising more than $7.8 billion in total funds.
As a crypto consultant, you’ll need to help your clients determine if an STO or an ICO is right for them. If your client decides to move forward with an STO or ICO, you’ll be asked to help prepare for the offering, execute it successfully, and ensure positive results moving forward.
STO and ICO tax and legal concerns
One reason STOs and ICOs are so popular is that they are good ways for companies to raise money outside the strictly regulated fundraising process required by banks and venture capitalists. Unfortunately, this gives rise to a host of ethical and legal concerns.
Should the company register the sale of their tokens with one or more U.S. states, or with the Securities and Exchange Commission? How should these token proceeds be taxed? What are the rules for cashing them in?
And which is better for business, an STO or an ICO? Right now, the answers to these and other considerations are unclear—but we do expect to see more STOs and less ICOs in 2019.
“There’s this whole issue going on with the SEC as to whether the sale of the token and the STO or ICO is considered a security or not. The SEC has been clear that they didn’t change the security laws. There are a variety of different legal opinions,” Kopelman said.
In some cases, criminals are soliciting funds for bogus ICOs in an attempt to defraud investors. The SEC is taking great steps to help investors avoid this—and in one instance, it’s doing so with an uncharacteristic sense of humor.
The STO and ICO Howey test
To demonstrate how easy it is to fake an ICO, the SEC created a website promoting HoweyCoins, a fictional digital currency. The page looks legit, complete with assurances of regulatory compliance, discount programs, a white paper, and headshots of executive and engineer “team members.” Clicking deeper into the site redirects the user to an Investor.gov page that details the perils of ICO scams.
As a cryptocurrency consultant, you definitely won’t want your firm or your clients associating with anyone trying to pull off a scam, or to be held liable for a crypto investment that doesn’t work out. But Kopelman says you won’t have to worry about that too much—at least not if you take a job at Aprio.
“There are certainly bad actors,” Kopelman said. “But everyone that’s doing an STO or ICO is not a bad character. To protect ourselves and our clients, we don’t advise people to buy or trade tokens. We don’t give investment advice. We provide tax, accounting, and consultant advice. And we are very particular about who we choose to work with.”
Averting the cryptocurrency dark side
Speaking of the dark side of crypto, it’s no secret that cryptocurrency has a polarizing reputation. Thanks to its anonymity, Bitcoin is the payment of choice for illegal online transactions. And some businesses do use cryptocurrency as a way to skirt regulations and avoid paying taxes.
Therefore, it’s imperative that cryptocurrency consultants practice tremendous discretion when choosing their clients.
“You’ve got to be a little more selective of who you’re working with,” Kopelman said. “We’ve turned down the same amount of crypto clients we’ve taken on in the last year.”
Like all forms of technology, cryptocurrency is neither inherently good nor evil—it all depends on how it’s used. As a cryptocurrency consultant, you’ll be on the frontlines of a bold new frontier, shaping the future of the digital economy and helping clients harness the power of crypto for good.
Join the cryptocurrency consulting team at Aprio
One of the earliest firms to accept Bitcoin as payment, Aprio is a prominent leader and innovator in the crypto space—and an employer you should definitely consider if you’re interested in becoming a cryptocurrency consultant.
“At Aprio, you’ll help clients understand how to account for their token transactions from a number of financial and tax standpoints. You’ll be guiding people in what we believe are our best practices for internal control, addressing issues like privacy and security,” Kopelman said.
The big question remains: Is cryptocurrency consulting right for you? Hopefully by now you have a better idea of your answer.
“Cryptocurrency consulting is a really exciting career path, and those who get in now will have a big advantage over those who wait around. It takes an adventurous mindset, but the potential rewards are substantial. And it’s never, ever boring,” Kopelman said.
If you want to become a cryptocurrency consultant at Aprio, a full-service accounting firm operating out of Atlanta, Ga., contact Mitchell Kopelman to get the ball rolling. Or if you just think Aprio sounds like a great place to work and want to get your foot in the door now, click on one of the links below to apply for an open position.