Blockchain has become such a hot topic among accountants that it's easy to forget how quickly the term has burst onto the scene in our profession.
Consider the following: A recent search of the term "blockchain" on journalofaccountancy.com produced 33 results. Of those, 27 were published between June 2017 and June 2018. A similar pattern can be found with other accounting publications and also with the associated terms "bitcoin," "cryptocurrencies/cryptocurrency," and "smart contracts."
Given blockchain's rapid rise into the accounting consciousness, it's no surprise CPAs have many questions about the technology. This article addresses five of the most pressing concerns I encounter regarding blockchain, smart contracts, and cryptocurrencies such as bitcoin.
Before we jump in, please keep the following in mind: At this point, there's really no debate about whether blockchain will radically alter how we do things, whether you specialize in auditing, tax, or accounting services. The key issue now is how to leverage this new technology to stay on top of our game and provide improved service to our clients.
1. How do I report cryptocurrencies?
While government regulation surrounding bitcoin and other cryptocurrencies is still in flux, it's clear that users hoping to use crypto to skirt regulations entirely are no longer able to operate in the shadows. A November decision by a federal district court in California forced popular crypto-trading site Coinbase to disclose the information of over 14,000 users so their transactions could be taxed (Coinbase, Inc., No. 17-cv-01431-JSC (N.D. Cal. 11/28/17)).
As of today, the IRS treats cryptocurrencies as property rather than currency for federal tax purposes (Notice 2014-21). Holdings are not taxed, but gains and losses are. When a trader who holds a cryptocurrency as a capital asset sells that cryptocurrency, the rule is that if it was held for less than a year it is treated as short-term capital gain and taxed at an ordinary income rate. If it was held for more than a year, it is taxed at long-term capital gains rates. If it wasn't held as a capital asset, the taxpayer will recognize ordinary gain or loss on the sale.
Increased regulation, however, is a near certainty. We're still in the Wild West, but the days of a more settled landscape are fast approaching. The IRS issued a news release in March reminding taxpayers that income from virtual currency transactions should be reported on income tax returns. In May, the AICPA submitted comments recommending the IRS release immediate guidance regarding the tax treatment of virtual currency transactions, similar to that of Notice 2014-21 so that authoritative guidance exists. All blockchain-based trades have a permanent record, so if you want to be conservative, it is safer to report these transactions. Note that cryptocurrency held in a foreign exchange account may also be subject to FBAR reporting on FinCEN Form 114, Report of Foreign Bank and Financial Accounts.
2. Should I accept bitcoin as payment?
There's no hard-and-fast answer to this question, as every firm is different. It's worth noting that some PwC and EY offices accept bitcoin as a form of payment for certain services. Following suit will certainly allow you to differentiate yourself from competitors. Additionally, first practicing with your own business or with your personal finances can teach you how the technology works and what intricacies to watch for. You can conduct small tests to try it out without making a huge commitment upfront.
If you do want to dip your toe in these waters, you can offset the risk by setting up a merchant account that converts cryptocurrency into U.S. dollars upon delivery. With a merchant account, you can accept bitcoin without actually having any on your books. Many reputable companies offer these programs. Of course, if you don't mind assuming some risk, you may just want to keep the bitcoin you receive as is.
3. What's the deal with smart contracts?
Smart contracts are another technology that functions on a blockchain. They use code to automatically execute the terms of a contract agreed upon by the two parties. As with all blockchain-based technologies, smart contracts are stored across a vast decentralized network, ensuring that no one party can alter the terms of the agreement, removing the need for the middleman.
Jacky Chi Kei Chan, an accountant turned software engineer, wrote in an article on medium.com that smart contracts present the potential for full cycle accounting. "By transacting through a shared accounting protocol over blockchain," he wrote, "previously incompatible accounting software communicate(s) in a cryptographically secure way." Smart contracts could result in a lot less time spent manually reconciling information. There are many examples of how smart contracts have cut out the middleman and increased the speed of operations, including at Barclays Corporate Banking, which uses smart contracts to log change of ownership, making payment to other financial institutions automatic and immediate.
4. Which skills could I benefit from learning?
The most important steps you can take are to immerse yourself in the possibilities and applications of blockchain and find experts with whom you can discuss potential client needs. It isn't always about knowing everything. Sometimes, it is about knowing enough, asking the right questions, and connecting with the right people. Develop relationships with advisory firms that aren't necessarily led by accountants but specialize in blockchain technologies and implementation. These firms can teach accountants both development and implementation strategy. For example, if you wanted to implement smart contract options but aren't sure what the code should look like, an advisory firm can help.
Being able to discuss these concepts with your clients will make a huge difference in delivering the services they will need in the future, and this will help them prepare to set up their own systems properly. Furthermore, once they are more prevalent, instantly verifiable information and full data sets will allow accountants and auditors to perform the work they do for businesses on a more continuous basis. By finding ways to incorporate this technology, we can be more proactive in the business. Delivering information faster ramps up the value we provide to our clients.
Blockchain has been called the biggest technological advancement since the internet itself. We all know firsthand how much the arrival of the internet changed accounting. It is why we are able to offer outsourced services to our clients and offshore our own work if we choose to staff globally. These changes often occur without our noticing until we look back. However, with a dedication to learning about rapidly changing technology, you can stay ahead of the curve and develop innovative ways to deliver services to your clients that aren't necessarily visible today.
5. Will blockchain put me out of a job?
It's the question on everyone's mind — even if many don't say it out loud — but the answer is "no." While blockchain is without a doubt a disruptive technology, there will always be a need for human accountants and auditors. No matter what technology has disrupted in our profession over time, that has remained unchanged. However; roles and duties will surely shift, and that is where we need to focus our efforts.
Looking ahead, the accounting profession could look a lot different in five years. Firms such as Deloitte believe that blockchain technology could end up supplanting double-entry accounting, which has been in practice since the Renaissance.
If you decide to take a "wait and see" attitude and do not accept this new technology and its implications, you could end up struggling to compete. As there are always early adopters, we are approaching a point in blockchain development where adoption is being tested by many in the accounting profession, and technological development is moving fast. It's important to start identifying small business processes you can start testing and put a plan together on how to address this in your practice, even if the first stage is dedicating time and investment to learning more. Coming back to this final question, it's ultimately up to you to stay relevant, learn how you can apply technological innovations such as blockchain to your services, and ensure you stay agile along the way. The one thing that is for sure today is that change will happen, and it will happen often.
Nothing is set in stone
Even though blockchain is here, experts still don't know all the ways it could be implemented. This leaves you the opportunity to be innovative and imagine new ways of working. Now is the time to learn everything you can, keep an eye toward the horizon, and make sure that the blockchain revolution doesn't happen with you on the sidelines.
Amy Vetter, CPA/CITP, CGMA, is member of the AICPA's Information Management and Technology Assurance (IMTA) Executive Committee and leads IMTA's Emerging Technologies Taskforce. She also has authored the book, Integrative Advisory Services: Expanding Your Accounting Services Beyond the Cloud, published by Wiley. Learn more at amyvetter.com. To comment on this article or to suggest an idea for another article, contact Jeff Drew, a JofA senior editor, at Jeff.Drew@aicpa-cima.com.