What was your journey into cryptocurrency like? What initially caught your attention and why?
In 2012 I picked up a new client and was working as a part time CFO. I was approached by an acquaintance who said, “We need to invest $5,000 in bitcoin–figure out how to do that.” Back then, it was more complicated and we had to use an intermediary.
Then, in the fall of 2016, this same client started getting involved in advising ICOs, and heavily investing in multiple cryptocurrencies. It was up to me to figure it all out. The way I learned was through opening a personal account with a number of exchanges purchasing various cryptocurrencies and moving them around. Then, when I had it figured out, I did it for my client in much larger amounts.
I then started attending events like the Washington DC Blockchain summit and Bitcoin Miami and Crypto Invest Summit. I really enjoyed the events so I went to every single one I could.
When did your firm begin offering crypto accounting as a service? What specific services do you offer to crypto clients?
I have been a tax accountant for 35 years and I’d like to say I’ve seen it all, but when people started asking questions about how to report their trades – or even asking if they needed to report their trades – I started really researching the reporting requirements. There wasn’t much to go on at the beginning so I went to every tax and law class I could find. I determined it was not as complicated as people think, at least not the tax part. In 2017 we could still use “like-kind” exchange treatment, and I did that a lot.
I took every call from people who just had questions. My favorite was an elderly gentleman who called and said he was doing his son’s tax return. The son was in college for five years and hooked up a mining rig in his closet. He cashed out his bitcoin in December 2017 and had a $900k gain. His dad had wanted to know how to report it.
I did my first cryptocurrency tax return in 2017 and have done many since then. I am a small firm with one worker, and I do all the tax work myself. I have yet to find more than a handful of people who really understand how the reporting works.
What are the top three mistakes you see crypto clients make when it comes to accounting?
1. Not reporting anything because they are scared or don’t know how to do it.
2. Only reporting trades that resulted in cash out.
3. Not using the correct basis.
What are the top three challenges when it comes to accounting for crypto?
The exchanges are not very report-friendly. They expel a bunch of numbers that are very hard to decipher. If you run a gain or loss report from one platform and then run it again on another, it yields different results. Sometimes there will be thousands of transactions to go through, and it’s really difficult to follow the money. Often, it’s important to step back and say, “Ok, what did I start with and what did I end up with at the end of the year?” I use the “prudent man” rule, and determine what would a prudent man report.
What's the future of crypto accounting?
Soon, there will be college classes in crypto accounting, and hopefully more competition in the reporting and tracking systems. We need good, smart people who understand it and can work in this arena.