Last year, the IRS announced it had formally moved the question, "At any time during 2020, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?" to the top of Form 1040. The question itself isn't new – a similar question appeared at the top of the 2019 Schedule 1. However, moving it to the front of Form 1040 indicates the IRS's growing focus on cryptocurrency tax compliance.
Many firms have been asking clients about crypto assets on their tax organizers for years. But is this enough? Kell Canty, CEO and co-founder of Verady, a cryptocurrency tax and accounting platform, doesn't think so, and for good reason.
Recently, we released a white paper, Crypto Assets: What Accountant Need to Know, which shared several regulatory, institutional and financial trends that indicate crypto assets are going mainstream and discussed the challenges of working with crypto clients.
The crypto asset tax gap
One particularly concerning area is taxation. As most CPAs are aware, according to IRS 2014-21, cryptocurrencies are treated as property, so gains and losses are taxed as capital gains or losses. In other words, if your client pays for dinner with Bitcoin, the transaction should appear on their tax return. That's a level of recordkeeping that few owners of crypto assets keep up with. In fact, they're likely not aware of it at all.
Coinbase, a US-based platform for buying, selling, transferring and storing digital currency, has roughly 35 million user accounts. Yet, when the IRS searched their database to see how many cryptocurrency transactions are being reported on Form 8949s, it found only 807 individuals reported transactions in 2013, 893 in 2014 and 802 in 2015.
It's easy to see why the IRS recently put out an RFP for contractors to assist with prosecuting cryptocurrency tax evaders.
Don't wait for your clients to ask about crypto assets
During a recent webinar we hosted with Canty, we asked participants about their level of involvement in crypto assets, on a spectrum from being aware of them but clients haven't mentioned owning them, to having a growing number of crypto clients and actively growing the service line. Roughly one-third of respondents said they're familiar with crypto assets but haven't been approached by their clients. Is it really likely that out of the hundreds or thousands of clients a firm services, not one owns a single cryptocurrency? We don't believe so.
In reality, most people who own crypto assets will not disclose it to their CPA unless they perceive the firm can add value. Some clients may be aware of tax reporting requirements but worry that starting to report now will trigger IRS scrutiny or a need to amend prior-year tax returns.
It's up to CPAs to proactively talk to clients about crypto assets and promote their knowledge and expertise. Currently, the IRS is encouraging voluntary compliance. Will you be at the forefront, helping clients start reporting now? Or wait until the IRS gets more aggressive about making an example of taxpayers who don't report transactions? This is an emerging asset class that CPAs must learn more about and we encourage you to become leaders rather than followers.
Start talking to clients about accounting and tax compliance for crypto assets. It will create significant opportunities for your firm – not just in the tax department but in accounting, auditing and advisory. If you don't, another firm will, and you will lose clients.
For more information and recommendations to prepare your firm for the future of crypto assets, read the white paper Crypto Assets: What Accountant Need to Know.
L. Gary Boomer, Visionary & Strategist of Boomer Consulting, Inc., is recognized in the accounting profession as the leading authority on technology and firm management. He consults and speaks around the globe on several topics including strategic and technology planning; mindset, skillsets and toolsets for the future; change management and developing a training and learning culture. He also acts as a planning facilitator and coach to some of the accounting profession's top firms.