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Year-End Cryptoasset Trends for CPAs
This past year saw many developments in blockchain and among cryptoassets. It can be difficult for practitioners to determine where they should focus as they prepare for 2022. There are, however, several core themes that practitioners should concentrate on as cryptoassets become more integrated into mainstream financial applications and clients begin to raise an ever-increasing number of questions on the topic.
By Sean Stein Smith, CPA, DBA
This past year has certainly seen many developments in blockchain and among cryptoassets. Everything from the rise of stablecoins, to the development of central bank digital currencies (CBDCs), to the introduction of nonfungible tokens and decentralized finance (DeFi), increasingly complicate the landscape. The Federal Reserve is actively researching crypto, and now there are bitcoin exchange-traded funds (ETFs) being actively traded. With all of these developments, it can be difficult to determine which should be the focus for practitioners as they prepare for 2022.
There are several core themes and ideas that practitioners should focus on as cryptoassets become increasingly integrated into mainstream financial applications, which of course will generate ever-increasing questions from external clients. While not exhaustive, the following should form the basis for a proactive approach to incorporating crypto into client conversations. It should be noted, the issues in this article do not touch the implications of bitcoin and crypto ETFs because the first such product only began trading toward the end of October and the prospect of multiple other such instruments will make accounting analysis difficult until the marketplace adjusts to this influx of new assets.
Cryptopayments are here to stay – With cryptopayments now enabled by household names that include, but are not limited to, Visa, Mastercard, PayPal, and eBay, it is increasingly simple and easy for individuals and institutions to use cryptopayments. The ease of access provides several benefits that are encouraging wider utilization. First, with incumbent organizations offering cryptopayments, consumers will have the protections and familiarity they are used to. Second, by enabling consumers to access these services more broadly – as opposed to via specialized crypto offerings – a wider pool of consumers will be encouraged to use crypto for transactional purposes. Practitioners should keep in mind that, while stablecoins form the basis for many cryptopayments (and have lower associated volatility), the compliance and tax reporting for these transactions are the same as if bitcoins were being used.
Nonfungible tokens are complicated – There are plenty of jokes about CryptoKitties and other digital collectibles using nonfungible tokens, but there are several fundamental traits and characteristics of which practitioners should be aware. First, there are going to be tax implications connected to the minting (creation) of nonfungible tokens and the purchasing of/investing in them. So, even if a client has only purchased a nonfungible tokens they still might incur tax liabilities depending on the facts and circumstances.
Second, not every nonfungible token operates in the exact same manner. Some of these instruments are able to be monetized by purchasers and investors as well as the creators. Specifically, there are some nonfungible tokens that allow an investor to monetize – via a noncommercial license – these instruments through a royalty stream. In other words, there can be capital gains and ordinary income linked to the same financial instrument.
DeFi is not one topic or idea – Decentralized finance (DeFi) has rapidly moved from a fringe, or emerging, issue to an aspect of the cryptoasset sector that has over $100 billion in assets allocated to these projects. Despite all of the conversation, coverage, and investment in this space, there is still a significant amount of ambiguity with regard to how DeFi actually operates. Even though the term itself is relatively simple to understand – organizations seeking to replicate and duplicate banking services without actually being banks – the variety of DeFi iterations can make providing advice very difficult.
DeFi iterations that exist involve, but are not limited to, yield farming, staking, liquidity pool operations, decentralized exchanges, and lending and borrowing cryptoassets are just a few of the options available to investors. With respect to the tax treatment of the income earned as a result of the DeFi options, earnings and income can be treated as ordinary income or capital gains, depending on the facts and circumstances.
Taxes and the integration of cryptoassets into organizations, payments, and other financial services will surely complicate tax and accounting questions linked to these instruments. In addition to these themes and trends that emerged in 2021, there is also the looming specter of changing tax and regulatory treatment at the federal level. Providing accounting services connected to cryptoassets is not a mysterious or unattainable idea. Rather, if practitioners are proactive, strive to keep themselves up-to-date on emerging issues, and remain engaged with market developments, cryptoassets will likely provide numerous opportunities moving forward.
Sean Stein Smith, CPA, DBA, is a professor at the City University of New York – Lehman College and serves on the advisory board of the Wall Street Blockchain Alliance, where he chairs the Accounting Work Group. He can be reached at drseansteinsmith@gmail.com.
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