Cryptocurrency

Digital currency is no longer a fad or experiment. Investing, trading, and paying for goods and services with Bitcoin, Litecoin, Ethereum, and other virtual currencies have become mainstream for individuals and businesses seeking new opportunities to build wealth and leverage the benefits of blockchain technology.    

The cryptocurrency ecosystem can be complex and intimidating but lucrative with proper guidance and counsel from trusted financial professionals. Daszkal Bolton created a dedicated Cryptocurrency Industry Group with tax, assurance, and advisory professionals to help clients evaluate the advantages and risks of using digital currency. The firm’s commitment to providing a comprehensive, 360-degree perspective benefits clients before, during, and after taking the plunge into this new ecosystem.   

Regulations Are Coming

Like other nascent industries, laws, and regulations guiding businesses and protecting investors and consumers are trying to keep pace with fast-moving technology. The Internal Revenue Service (IRS), Securities & Exchange Commission (SEC), and state agencies such as the Florida Division of Consumer Services promote the emerging market while educating consumers about the risk and preventing fraud and other misconduct. There is limited guidance regarding the associated tax implications of virtual currency besides Notice 2014-21.

Blockchain technology uses cryptography to record transactions and track assets in a shared permanent ledger. Proponents believe it has the potential to fundamentally transform financial transactions, large and small, by expediting payment processes, reducing costs, and improving security, leading to greater transparency and trust. However, anything so new requires careful assessment and risk analysis. The Daszkal Bolton Crypto Industry Group is ready to answer your questions and guide your crypto journey.  

What You Need to Know

Digital currency uses public and private keys to transact and protect value. Your public key is part of the perpetual blockchain record; conversely, the private key is confidential to ensure control and ownership of your investment. Your private key (and assets) can be irretrievably lost if misplaced or stolen. Securing your private key in a safe place is essential and part of a larger strategy to keep meticulous records of your virtual currency and transactions.

A “digital asset” is any digital value recorded on a cryptographically secured distributed ledger or similar technology. While this definition may change slightly, it includes the most popular cryptocurrencies (e.g., Bitcoin, Ethereum) and non-fungible tokens (NFTs). NFTs are data units that form something unique in a digital format, and examples include one-of-a-kind artwork, music, videos, images, content, and other creations.

With the rapidly changing tax, audit, legal and regulatory landscape, relying on professionals who immerse themselves in the digital asset space is essential to protecting your business or investment. Daszkal Bolton’s dedicated Crypto Industry Group helps clients manage the unpredictable marketplace professionally.  

Services Offered

Federal Tax

Taxing cryptocurrency is a top priority for the IRS; look no further than the top of Form 1040, where it asks: “At any time during this tax year, did you receive, sell, exchange, or otherwise dispose of any financial interest in virtual currency? immediately following your name and address.

It is essential to understand the lexicon of cryptocurrency and the impact of related investments and transactions for tax purposes. Notice 2014-21 states that cryptocurrency is classified as “property” under federal law, creating various planning opportunities. Crypto transactions benefit by not being subjected to the “wash rule,” prohibiting tax deductions for losses on selling stocks or securities for 30 days. The property classification provides another valuable tax planning benefit. Investors can use tax-loss harvesting rules to take advantage of the volatility of virtual currencies.

Cryptocurrency transactions are taxable events that should be carefully documented, including but not limited to activities such as airdrops, staking, yield farming, sales, exchanges, or purchases. Taxpayers should monitor currencies in their wallets or exchanges to correctly identify and record them. To calculate income for tax purposes, investors must maintain all the necessary records to determine cost basis, fair market value, and the gain or loss on every transaction (trade, sell or spend).

The taxpayer’s business and use of cryptocurrency determine various tax implications. Reporting ordinary income gained from mining, staking, interest, or payment in cryptocurrency requires different tax forms and can change depending on individual circumstances.

New reporting requirements intended to promote transparency and security will regulate brokers and others who facilitate digital asset transfers for others. Like other financial brokers, regulations will require them to report digital asset transactions to the taxpayer and the IRS at the end of each year.

Daszkal Bolton’s tax professionals help clients navigate the evolving crypto landscape throughout the year, especially at tax time. The team developed tools such as the Daszkal Bolton Crypto Industry Checklist to help clients improve controls, limit exposure, and build confidence in processes that track the existence and accuracy of digital accounts.

State Income & Sales Tax

Although few states have specifically addressed cryptocurrency in statute, such digital currencies will likely have significant state and local tax implications and obligations like other investments generating income. Several states have already issued rules on how virtual currency will be treated for state income, sales tax, and unclaimed property rules.

For example, a few states, such as New York and New Jersey, have specifically outlined virtual currency income tax treatment. And several states, including California, Michigan, Missouri, New Jersey, and Washington, have provided guidance on sales tax for transactions involving virtual currency. And due to the Wayfair decision, at least 30 states apply state sales tax to digital products and services. Other considerations for state and local tax policymakers include whether a virtual currency can be considered unclaimed property after a certain period of dormancy and how NFTs will be taxed. Unlike cryptocurrencies, NFTs cannot be traded, copied, or divided for equivalency due to their unique digital identifier.

Daszkal Bolton’s State and Local Tax experts regularly monitor state income and sales tax changes to help clients understand varying tax regimes and incorporate state income tax planning into their comprehensive tax strategy.

Valuation and Advisory

The growth and mainstreaming of cryptocurrencies have significant implications for mergers & acquisition deals as traditional financial companies enter the marketplace and adapt to future financial services and markets. Proper treatment of virtual currencies in a transaction can have various implications on the enterprise value of the entity. Determining value includes common factors such as supply, demand, and competition, plus new, more nuanced considerations such as node counts and adoption.

The Daszkal Bolton Valuation and Advisory teams have experience investing in cryptocurrencies since their infancy and are well-versed in the markets driving these transactions. As these asset classes continuously evolve, you can rely on Daszkal Bolton to provide practical, forward-thinking advice and consulting on using blockchain smart contracts for Letters of Intent (LOI), purchase agreements, settlements, closings, and earnouts.

Audit

The lack of official guidance from U.S. standard setters on cryptocurrency transactions has created challenges for financial accountants and auditors. Accounting practitioners have looked to guidance issued by the International Financial Reporting Interpretations Committee (IFRIC), which concluded that the accounting treatment for holding cryptocurrency should follow the accounting treatment for Intangible Assets (IASB 38).

Audit procedures help gather evidence to support an auditor in forming an opinion on whether financial statements are presented fairly by a specific accounting framework. The audit risks considered include management’s financial reporting assertions of existence, rights and obligations, completeness, valuation and accuracy, authorization, cut-off, occurrence, and disclosure.

  • Existence – Since cryptocurrency is a digital asset maintained in a decentralized distributed ledger, traditional confirmations verifying existence are unavailable. Examining the asset’s supporting documentation can confirm its existence.
  • Rights and obligations – Inspecting third-party agreements and confirmations and assessing internal controls at the client and the exchange can provide needed assurance.
  • Completeness – Verifying whether all cryptocurrency transactions are recorded on the blockchain.
  • Valuation and accuracy – In determining the fair value of cryptocurrency assets for possible impairment, the unit of measure is important (per unit or as a portfolio). Demonstrating accuracy includes reviewing reconciliation controls, recalculating amounts, inspecting documents, and assessing internal controls.
  • Authorization – Source documents supporting recorded transactions provide evidence that the financial statements reflect authorized transactions.
  • Cut-off – Reviewing documents that demonstrate proper recording of transactions in the appropriate period.
  • Occurrence – Obtaining evidence that the transactions reflected in the financial statements are valid and occur when revenues are earned, or expenses are incurred.
  • Disclosure – The note disclosures are an integral part of the financial statements. Minimum disclosures include the accounting policies for cryptocurrency transactions, the nature of the cryptocurrency, fair value measurements, and associated risks.

While the regulatory framework for accounting and auditing digital assets and transactions continues to evolve, Daszkal Bolton’s Audit practice has the accounting and auditing experience necessary to help businesses identify and assess risks associated with accounting for and reporting on transactions involving cryptocurrency.

Daszkal Bolton’s trusted financial professionals, including tax, assurance, and advisory experts, are helping clients evaluate the advantages and risks of using digital currency and ensuring compliance with ever-changing rules and regulations.

Key Contacts

Director | Tax Services

Partner | Tax Services Leader

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