While I haven’t been an accountant for as long as some seasoned financial professionals, I have been in the game for long enough to see trends come and go. I have witnessed the tail end of the subprime mortgage crisis and have heard stories from veterans about the dot-com bubble in the late 90s. One thing that has remained the same throughout all these experiences, based on my experiences and the experiences of my peers, is the core value of all these assets. Whether it’s a web domain, a property, a rare earth mineral or a fossil fuel, all forms of capital that I have worked with track their gains and losses based on a dollar value.
With the advent of cryptocurrencies like Bitcoin, it is entirely possible that this time-tested financial framework is about to change. Using the power of the blockchain, the entire concept of money is being turned on its head through the rise of this new data-based currency. Although our current understanding of currency has transformed within the past few decades thanks to credit cards and fiat, cryptocurrencies are the logical next step in this evolution.
This is understandably concerning for accountants, but what does it mean for entrepreneurs? Well, anyone interested in starting or maintaining a successful business is going to need a competent accounting team. As the financial landscape changes, the experience and insight needed by business accountants will change as well. Understanding this upcoming paradigm shift can better help entrepreneurs future-proof their organizations and may even help them to save money on accounting-related business expenses.
Brief Summary Of Modern Accounting For Bitcoin
The current financial paradigm views Bitcoin, Ethereum and all other cryptocurrencies as assets. In the United States, for example, any form of cryptocurrency is considered property instead of currency. Although the IRS acknowledges that Bitcoin can function as “a medium of exchange,” it is not classified as currency due to the fact that it also commonly functions as “a unit of account and/or a store of value.”
Because of this classification, changes in value and quantity of cryptocurrency is taxed to be capital gains or losses. Obtaining larger quantities of bitcoin, either through mining or buying it, will result in an increase in capital, making it subject to capital gains tax. The same is true for trading or selling cryptocurrency, as these events are considered taxable as gains or losses of capital. Therefore, accounting for holdings in bitcoin or other altcoins would be done in much the same way that other forms of equity are, such as property or stocks.
A Prediction For The Future Bitcoin And Accounting
As the blockchain and cryptocurrency gain legitimacy in the world of finance, the nature of accounting for Bitcoin and other altcoins is subject to change. Although much of the potential changes are too far away to accurately predict, one aspect of the accounting process is guaranteed to drastically change in a way that is bound to affect all entrepreneurs and business organizations: auditing.
Here’s how the blockchain and cryptocurrency are primed to violently disrupt the auditing process, and what it means for businesses that hire auditors. Since Bitcoin is currently classified as property subject to capital gains taxation, the method of auditing its value is known as point-in-time forensic analysis. However, the instant verifiability of blockchain technology renders this method of auditing obsolete.
The blockchain is a decentralized public ledger updated in real time. Any individual can view the entire history of transactions for bitcoin, litecoin, ethereum, and any other cryptocurrency the moment a new block is generated or a new transaction is made. Because of the ability to receive instantaneous updates, slower methods of auditing like point-in-time forensics are simply unable to keep up.
According to a lead auditor at PwC, “The standard approach [of point-in-time forensic analysis] will be replaced by a process that’s closer to auditing of transactions in real time, and this change will prove challenging for most internal audit departments.” While the form in which this new method of auditing isn’t clear at this time, one thing that is clear is the fact that most current auditing practices will be abandoned because they are either obsolete or redundant.
The Future Role Of Accounting For Business
The implication of this shift in accounting strategy may be confusing for the modern business owner. Does this mean that you should fire your auditor if they can’t tell you about the blockchain? No, but you should be wary of any accountants on your team who don’t have at least a passing interest in it.
For now, the most prudent course of action entrepreneurs and business owners can take is to educate themselves on cryptocurrency and blockchain technology. Since I’ve been following blockchain news, it seems like every week there’s a new industry or facet of our society that is toying with blockchain implementation. In fact, a story broke recently about the potential for this technology to transform the rule of law.
As you track these changes and developments, discuss them with your organization’s accountant or financial consultant. They can help you to understand the further implications of these events; in some cases, they may even be able to show you how actions you can take in response to these events can increase your profits, reduce your costs and open up new avenues for your business to pursue.
On the other hand, if your accountants and analysts respond to your research with blank stares, consider updating your financial team.