Cryptocurrency and blockchain are two of the hottest technologies to hit the world of finance and accounting in the last decade. But despite having generated billions of dollars of new value, the rules around them are still poorly defined, and that’s proving to be a headache for accountants.
Modern accounting depends on a set of well-established rules. Accountants have refined their trade through the GAAP framework to the point where practically every type of transaction can be neatly categorized on the balance sheet, income statement, or cash flow statement. But cryptocurrencies are creating problems. Not only are they a new asset class, but how they fall into existing categories remains an open question.
The Tax Problem
The relationship between cryptocurrency and taxes is still developing. When filing company and personal taxes, accountants need clear rules to calculate how much is owed to the taxman.
The current HMRC rules date back to 2014, a time when the cryptomarket was very different. HMRC explicitly states that bespoke regulations are not required, and that bitcoin and other cryptocurrencies are taxable in the same way as gains and losses from the trading of foreign exchange are taxable.
Accountants are still grappling with these rules. Capital gains, income, and corporation taxes remain applicable to cryptocurrency transactions. And this has meant that accountants have needed to be more hands-on with their clients, reminding them that they need to record the price at which they bought and sold the currencies so that taxes can be calculated in the future.
The Asset Problem
Before the advent of cryptocurrencies, the world of accounting remained relatively unchanged. There were clear rules for the three main asset classes: equities, fixed income bonds, and cash. But crypto doesn’t seem to fall into any of those categories. It’s a kind of hybrid asset.
Most accountants consider cryptocurrency to be an alternative asset. It is sufficiently investable – a requirement of alternative asset classification – and it is liquid enough to exchange easily. Its value is decoupled from the value of other assets in the market. And it has its own unique risk-reward profile: high-risk, high reward. The value of bitcoin rose by more than 1000 percent in 2017, before falling back to below $6,000 by mid-2018.
For accountants, this means that there are likely to be wild swings in the tax liability of their clients. Going forward, there will be a need for new software tools to account for cryptocurrency payments in business, especially in situations where there is a high volume of transactions.
Are Cryptocurrencies Here To Stay?
While most accountants are reluctant to make predictions about the longevity of any particular cryptocurrency, they do agree that the supporting technology is likely here to stay. Blockchain, the distributed ledger technology that undergirds all major cryptocurrencies, has many uses in the financial space, beyond providing a basis for new digital money.
For instance, distributed ledgers will likely be deployed in financial contracts and situations in which transaction costs need to be exceptionally low. They will also help make the life of accountants easier by providing a clear audit trail, accessible directly from the platforms themselves instead of third-party records.