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Digital/Virtual Currency Compliance – A New Practice Area for CPAs and Tax Professionals

A little just over a year ago, the IRS issued Notice 2014-21, guidance on how existing tax principles apply to digital currency. This was quite an event because one of the most significant components of this notice was that virtual currency wouldn’t be treated like a currency at all – in fact, it was quite the opposite, it would be classified as a capital asset.

Over the past year at Libra, we’ve encountered many different individuals who are looking for professional accounting expertise in relation to their digital currency use. A number of businesses reach out to us as well to determine exactly who they should speak to regarding the various intricacies and complexities of their accounting needs – we are always referring them. Based on this information, it seems almost certain that there is a significant and deficient gap between the number of digital currency users, who currently make up a market capitalization totaling into the billions of dollars, and the number of people in the accounting industry to service them.

This should not be a problem and the solution is within reach.

As virtually all CPAs and tax professionals possess the basic understanding of taxation and accountancy of capital assets, expanding into handling the needs of digital currency users, as it turns out, is not that big of a step. One must simply keep track of acquisitions/purchases and sales/disposals of virtual currency and report the short or long term gain or loss. The fundamental difference, however, is recognizing the situations when this happens. Here are a few examples:

  • Internet “tipping” – a new growing trend among Internet users is “tipping” – sending virtual currency as a tip for various activities (a nice blog post, a good comment, or $5 worth of Bitcoin for a beer – there are countless examples). *A lot* of virtual currency is being moved around in this context that is later converted to dollars and used offline. The acquisition and disposal price of virtual currency must be tracked for the purposes of accounting short or long term gains or losses in this scenario.
  • Buying something with virtual currency – usually when someone purchases something with virtual currency, it results in the redemption of a small portion of some virtual currency they acquired at an earlier date. In this instance, it’s important to utilize a cost-basis method such as FIFO to determine what the gain or loss was as a result of the transaction. An example of this would be if an individual bought $100 worth of Bitcoin at some point during the year, and then later in the year paid for dinner with some of that Bitcoin. A cost basis method would need to be utilized to establish whether the Bitcoin was worth more or less than what it was originally acquired for on the day some of it was redeemed to pay for a dinner.
  • Receiving virtual currency as income – in this instance the digital currency user has to recognize the currency at whatever price it was worth at the time it was paid to them as income. They are liable to pay tax on the total amount that was paid based on their income bracket. There has yet to be guidance, however, what happens after that – if they held the currency and it appreciated over time, or depreciated to be worth less than the amount it was worth when it was received as income – the taxability of that gain or loss.
  • “Mining” virtual currencies – there are significant portion of people who use basic or highly-specialized computers to help support various digital currencies. Their super-fast processors help validate transactions as authentic in their currency network. As a result, they often receive “rewards” which are various amounts of digital currency. This mining reward is taxable immediately as income. That said, there is often a frequent situation that arises amongst miners where they seek out an accounting professional – they would like to expense various transactions around their mining business, such as the purchase of their mining equipment, selling it for less than it was worth, or writing off a portion of their electric bill (mining equipment and cooling systems used in conjunction with them often consume large amounts of electricity). These people need professional expertise.
Annette Nellen is a former IRS employee and the head of the Graduate Tax Program at San Jose State University.

It’s important for a accounting professionals to ask their clients whether or not they’ve had any virtual currency transactions, for example, whether or not they’ve ever had any Bitcoin. A significant portion of people do and the number is growing.

For these people, unlike some other types of taxable capital asset transactions, their taxable virtual currency transactions must be substantiated on Form 8949 to supplement the overall short or long term gain or loss that’s being declared on the Schedule D. For CPAs or tax professionals, this is a huge headache and very time-consuming to calculate manually or by hand. We speak with industry professionals on these topics on quite a regular basis and the feedback is quite uniform.

To eradicate this problem, Libra has developed Libra Pro, so that any accounting professional can manage multiple clients and calculate reportable gains and losses, as well as Form 8949 – automatically, on-demand, fast. By utilizing proprietary technology that automatically connects to major digital currency exchanges, transactions are seamlessly accounted for which saves many hours, and in some cases, days worth of work.

Libra Pro allows certified public accountants and tax professionals to easily enhance their practice by providing services related to digital/virtual currency compliance, with minimal effort. In addition, CPAs also gain the ability to become part of Libra Connect, which Libra utilizes to route individual and business users to licensed tax professionals – a frequent occurance and a new opportunity for users and accountants alike, to establish beneficial relationships.

Digital/Virtual Currency is here to stay, and will no doubt over time become part of the practices of many certified public accountants and tax professionals.