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Aug 15, 2022

Crypto Risk Management: Think Defensive Documentation

Ron Klein, JDBy Ron Klein, JD


"Hope for the best, plan for the worst" is a sound risk-management approach. And when it comes to your client being exposed to cryptoasset risk, "plan for the worst" may be a necessity. Cryptoassets are unpredictable and potentially volatile. Should a crash occur, your clients will wonder why their CPA did not warn them. Remember, though it is unfair, a CPA's job in the eyes of a jury is to advise of financial opportunity and warn of financial risk.

Prioritize "Proactive Documentation"

Proactive documentation, sometimes referred to as defensive documentation, is the first line of defense in any claim scenario. When there is no accurate written description of the terms and conditions of an engagement, claimants can more easily assert the CPA was responsible for providing services the CPA did not consider part of the engagement and there was a guarantee of success of whatever transaction the claimants initiated while a CPA's services were engaged.

It is critical that engagement letters include a clause regarding the IRS's reporting requirements for virtual/crypto assets and to clarify a client’s responsibility to provide the CPA with all the necessary information.  

Physical representation of bitcoin, etherium, etc.: cryptoassetsConsider adding the language below to engagement letters for all individual tax clients, whether or not invested in cryptoassets (directly or indirectly), and all other clients known or suspected to be invested in cryptoassets:

Please note the Internal Revenue Service (IRS) considers virtual currency (e.g., Bitcoin) and other digital assets (e.g., nonfungible tokens – NFTs) as property for U.S. federal tax purposes. As such, any transactions involving cryptoassets or transactions that use or exchange virtual currencies are subject to the same general tax principles that apply to other property transactions. If you had any cryptoasset or virtual currency activity during the [year] tax year, you may be subject to tax consequences associated with such transactions and may have additional foreign reporting obligations.

You agree to provide us with complete and accurate information regarding any transactions in cryptoassets or transactions using any virtual currencies during the applicable tax year. Please ask us for advice if you have any questions. If you require additional consulting services to evaluate the specific treatment of digital assets or virtual currency, and we agree to perform such services, such services will be covered under a separate engagement letter.

For those clients who have known virtual asset transactions, it may be prudent to have them sign a tax representation letter or a stand-alone certification letter at the conclusion of the engagement that includes language addressing cryptoassets. The additional defensive documentation provides support and evidence of the clients’ understanding and acceptance of their responsibilities with respect to virtual asset transactions and the limitations of the services the CPA is providing.

The best way to inform clients of the risks and the tax consequences of cryptoassets is to provide a robust written client communication. A limited example of such a communication may include the following:

Directly or indirectly investing in cryptoassets involves significant risks that should be seriously considered. As an investor, some of the risks to consider include:

  • Cryptocurrencies are speculative because they have no intrinsic value, and their market value is based on a high level of uncertainty and dependent upon investor confidence. Some commentators believe that a crash in value is inevitable.
  • The virtual asset marketplace is largely unregulated and investments in cryptoassets are not insured by any government agency. Transactions are irreversible, anonymous, and may occur in any location around the globe.
  • Transactions occur instantaneously. There are no "gatekeepers," so anyone can download the associated software.
  • There may be periods of illiquidity.
  • There is a significant risk of theft of cryptoassets through fraud or cyberattacks with little or no recourse for the victimized investor.
  • There are specific tax rules regarding virtual asset transactions.

Your client communication should also include some call to action. For example, you could include something along the lines of "Please advise us if you are investing in any cryptoassets or whether you have taxable or sales transactions or exchanges using virtual assets."

Additional Steps

Stay current on the rules and risks associated with virtual and other cryptographic assets, even if you refer the client to a specialist outside the firm. Risks will likely escalate as new virtual investment opportunities arise. For example, you may have a client who has invested in NFTs. These are unique cryptographic assets (tokens), like a one-of-a-kind baseball card, and can be anything digital (e.g., drawings, music, digital art). Understanding what an NFT is, how they work, what sort of software tracking is available for recording the sale and purchase of NFTs are just a few of the uncertainties CPAs need to address if they have clients entering into the cryptoasset community.

As a final word: do not “dabble.” Crypto has opened a whole new world of possibilities, but there are also potential liability risks for CPAs who dabble. Tread carefully, arm yourself with knowledge, and know your limitations.


Ron Klein, JD, is risk management counsel with CAMICO. He has been with CAMICO since its inception in 1986 and managed the claims department for 25 years.


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Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of PICPA officers or members. The information contained in herein does not constitute accounting, legal, or professional advice. For professional advice, please engage or consult a qualified professional.