Over the past few years, cryptocurrency and its underlying technology, blockchain, have started to evolve from being misunderstood concepts into a mainstream means to conduct digital transactions.
Cryptocurrency is a digital form of currency used as a medium of exchange for conducting internet-based sales and financial transactions. Unlike paper bills or coins, cryptocurrency lacks physical properties and is stored in virtual wallets rather than bank accounts. The use of cryptocurrency to pay for goods and services is decentralized, meaning it is not dependent on the use of banks, credit card companies, or third-party payment services (i.e. PayPal or Venmo). While virtual currency can be converted to real currency, its value tends to be more volatile with rapid and frequent fluctuations. There are over 1600 different cryptocurrencies currently available with Bitcoin being the most widely known.
Blockchain is the underlying technology that tracks, records, and lists all transactions conducted using cryptocurrency. Each transaction creates and adds a new block of information in a shared ledger which is verified by “miners” who use advanced computer hardware and software to solve complex mathematical equations to verify all transactions. This creates an audit trail and ensures that no past transactions can be altered without the consent of the majority. Simply put, blockchain = accounting ledger.
From a global perspective, cryptocurrency and blockchain are already being trialed and accepted by many big businesses and governments around the world. Companies such as Microsoft, Virgin Galactic, Amazon and Subway are currently accepting cryptocurrency as payment, and some of the “Big 4” accounting firms are working on expanding their platforms to include blockchain capabilities in response to the growing interest in virtual currency. The IRS has issued guidance on the tax treatment for transactions using virtual currency, and recently began to issue letters to crypto account holders advising them of U.S. tax filing requirements and warning of possible consequences for those who remain non-compliant.
As the business world continues to adopt the use of a blockchain-based accounting system, and more individuals come to accept blockchain technology as an alternate means to conduct financial transactions, accounting professionals will spend less time on tasks such as reconciliations and bookkeeping and will move towards spending more time on interpreting information and advising clients on business decisions. Tax preparers and financial advisors will need to be mindful of regulations and tax ramifications for clients who invest in or use cryptocurrency. This evolutionary technology is set to have a major impact on the financial world, and accountants, tax professionals and advisors must be able to speak the lingo!