According to Chainalysis’ 2024 Global Crypto Adoption Index, the United States ranked fourth in the world for crypto adoption. This shows that digital assets are now becoming a meaningful consideration for many U.S. companies and advisors.
Okay, let’s unpack this a bit. Virtual assets are really broad these days. You have digital tokens that are basically identifiable, programmable value, just being stored in blockchain networks. You also have coins, like Bitcoin or Ethereum, which is are coins with its own blockchain. Then you have NFTs, which are non-fungible tokens that represent you own some unique digital stuff. Additionally, you have stablecoins, which are coins that are supposed to be stable-backed by a respected currency (like the U.S. dollar).
The Financial Accounting Standards Board has issued updated guidance in 2023 just for accounting for crypto assets, and the IRS is still refining its methodology for taxing virtual currency. So now what are the implications of that for those in the field? Updated methodologies, documented growth, and new considerations for audits as part of the whole package for financial services.
The American context for standards and regulations.
That’s where it gets particularly fascinating from a regulatory perspective. The Financial Accounting Standards Board governs Generally Accepted Accounting Principles within the United States and that’s your GAAP foundation right there. The impact of FASB comes directly to the practitioners in the classification, measurement, and disclosure on financial statements for virtual assets. From a practical perspective, that involves determining the appropriate measurement methods, determining what should be disclosed, and making sure everything aligns across reporting periods.
The Internal Revenue Service? They’re calling the shots on federal tax treatment. And here’s the kicker, they treat virtual currency as property, not actual currency. This creates very specific obligations for practitioners. You’re dealing with basis tracking, gain and loss recognition, income reporting, all of which directly impact how bookkeeping systems need to be set up. Enhanced documentation and transaction tracking aren’t just nice-to-haves anymore.
Next up is the Securities and Exchange Commission, which has authority on securities regulation and disclosure obligations that may apply to virtual assets based on what they are and how they are sourced and distributed. For SEC lawyers, SEC guidance drives disclosure expectations, custodial issues, and compliance obligations—particularly if you are working with regulated companies or public companies.
And don’t forget the international aspects. The Organisation for Economic Co-operation and Development (OECD) has developed the Crypto-Asset Reporting Framework (CARF) regarding the international exchange of information across borders for international tax transparency. The OECD affects the U.S. practice with international cross-border reporting obligations and heightened due diligence for clients engaged in international digital asset activities.
Central Accounting Principles Applying to Virtual Assets
Every single virtual asset transaction forces practitioners to answer four basic accounting questions.
- First up: what exactly is this thing in terms of classification within your client’s chart of accounts and financial statement presentation?
- Second: how do you measure it initially when acquired, and then later in future reporting periods?
- Third: how do you handle gains and losses from value changes or when assets get disposed of?
- Fourth: what information needs to be disclosed so financial statement users actually understand what’s going on?
FASB’s 2023 guidance established something pretty significant—certain crypto assets held by entities should be measured at fair value, with changes in fair value hitting net income each reporting period. This is actually a big departure from traditional cost-based measurement for intangible assets. The real-world impact? Volatile virtual assets can create massive balance sheet and income statement swings based purely on market movements, even when no actual transactions happen.
This direct approach to measuring has a direct effect on how you assemble financial statements and deliver to clients. Professionals need sound procedures for accumulating fair value measurements, recording their valuation techniques, and communicating the financial statement implications that arise to clients. Fair value also brings new reconciliation and control concerns, since book values will vary with markets rather than being constant until sale.
Filing Requirement and Tax Rules for U.S. Taxpayers
The IRS treatment of property creates some very specific accounting and documentation requirements that are different from typical money transactions. As clients are paid in virtual currency, the practitioners must journal the fair market value at date received as income. As clients are disposing of virtual currency—in exchange, sale, or purchasing items with it—they must account for capital gain or loss on a dollar disparity between disposal proceeds and the cost basis of an asset.
This type of property treatment requires that practitioners maintain detailed cost basis records for each unit of a virtual currency or for each transaction. We have to know acquisition and disposition dates, acquisition and disposition costs, and we need to know how to compute holding period for capital gain/loss treatment. The IRS has been clear that each disposition is a taxable event and that converting virtual currency to money, trading virtual currency for another form of virtual currency, or trading virtual currency for goods, all generate a taxable event!
Recently, IRS announcements have also been issued relating to some unique situations like staking rewards, hard forks, and NFT transactions. Staking rewards are more typically considered to be ordinary income when received at fair market value. Hard forks can create taxable income only if the taxpayer received a new virtual currency. The NFT transactions will be based upon the usual property rules, which is that the creator will have ordinary income, and the collector will have a capital gain or loss.
Monitoring records and documentation for tax compliance isn’t easy and it needs to be done. Professionals have to track historical transaction databases, document exchanges, record wallet addresses, record dates of exchange, verify fair market value on the date of each exchange, and keep backup documentation for each value determination. Poor recordkeeping = tax compliance issues with IRS scrutiny, potential penalties, and never-ending discussions regarding whether you correctly complied with your tax obligations.
Practical Aspects of Bookkeeping and Control
Effective management of virtual assets requires that practitioners fortify their controls and documentation practices to keep in line with the peculiarities of digital assets. Custody monitoring involves maintenance of current records on all wallet addresses, exchange accounts and third-party services that possess client virtual assets. This involves maintaining records for access credentials, authorisation protocols, and ensuring different clients or purposes are sufficiently segregated.
Keeping track of transaction history means we’ve gotta set up solid ways to grab all the transaction records from everywhere clients are doing their virtual asset thing. Here’s the kicker—lots of clients are using different exchanges, wallets, and decentralized platforms, which makes piecing together a full transaction history super tricky. So, folks need some steps to get, check, and balance transaction data from all the places that matter.
You gotta make sure to check your virtual assets against your general ledger on a periodic, verifiers basis and each year or whenever possible. Depending on the engagement and the amount of transactions or balances, this may require more attention. Unlike traditional assets, however, the virtual asset balances may also be verified independently using blockchain exploration software. Practitioners need to know how to verify on the blockchain and reconcile their procedures.
When dealing with the concept of signing documents, the authorization and approval processes have to deal with something else relative to traditional assets, which is much different. When the virtual currency is transferred to an unauthorized address or the transfer uses an unauthorized method, recovery is often impossible. Practitioners should stress the need for clients to adopt standards for multi-signature approvals, create authorization workflows, and create justification for each transfer of virtual assets.
The American Institute of CPAs has produced practice aids pertaining to the accounting and auditing considerations of digital assets, which include frameworks for internal controls, audit processes, and risk assessments. The practice resources outline other considerations with regard to technical competency around safekeeping virtual assets, authenticity, verifying electronic transfer records, and valuation considerations.
Valuation and Fair Value Issues (Simplified Breakdown)
The value of virtual assets creates some very unique issues, meaning we have to work together and create unique methods and methods of documenting our work for the specific situations we encounter. The volatility in markets creates situations where the value of assets can move significantly over narrow periods of time, and when we look to deliver accurate measures of value for financial reporting, the time at which we perform these valuations becomes a key issue.
Most traditional (physical) assets have established markets, while most virtual assets are being traded on a series of different exchanges that have a series of different liquidity and price differentials. Thinly traded tokens create particular valuation issues because occasional trading may not provide reliable indications of fair value. There are examples of virtual assets that have low frequency trading or even only trade on specialty exchanges, and therefore cause difficulty in being able to identify representative market prices. We have to create methods for understanding the quality of the market information and when observable price information from the market is a reliable measure of fair value.
We apply different valuation methods for stablecoins and volatile tokens. Stablecoins are designed to say stable against referring assets, while, by contrast, there are many cryptocurrencies that are prone to price volatility. The range of decentralized finance roles and the nature of wrapped tokens, which can involve multiple underlying assets or seem derivative in nature, adds to the complexity and is important to consider in the context of choosing a methodology.
Professional services firms have released useful guides on digital asset valuation that can be used by practitioners for their own valuations of clients. For example, PwC’s guide on digital assets has provided detailed steps on valuation methods, data analysis, and fair value measurement documentation. This guide recommends practitioners to use observable market data where available, support for valuation methods and data with appropriate documentation, and consistency at the reporting period.
Documentation for valuation work includes identifying reference prices, noting valuation dates and times for reference prices or notes; supporting evidence of data testing for quality; a record of adjustments made or assumptions made regarding valuation conclusions. The documentation is useful for audit support and for regulators.
Disclosures and Audit Expectations
Disclosures in the financial statements related to virtual assets are a function of their materiality and the reporting entity’s reporting framework, but in addition to materiality considerations, one would also expect to see enhanced disclosures and increased regulatory scrutiny on disclosures. There should be enough information included in the financial statements that users of the financial statements can understand the nature, extent, and financial statement impact of holdings in virtual assets and virtual asset activities.
Internal audit focus areas of custody arrangements and security procedures, among other matters, is routinely considered; however, virtual assets create additional risks with respect to digital security, key management, fraud prevention, etc. Auditors need to assess the segregation of duties, authorization procedures, and technical controls around the management of the virtual assets of the reporting entity. Of particular note and maybe the greatest focus will be how the reconciliation procedures have been developed. Auditors must be able to confirm that the reported balances for virtual assets are consistent with what is held across all platforms and custody arrangements.
Valuation support is also escalating as an audit consideration. Auditors are required to assess the reasonableness of fair value measurements and the quality of the underlying valuation sources. This assessment requires assessing the quality of market data obtained, the calculations used to support valuation, and the appropriateness of the various valuation methods selected for reporting purposes for each distinct category of virtual asset.
The Securities and Exchange Commission has indicated that publicly traded companies with substantial volumes of virtual asset activities should expect additional scrutiny regarding disclosures and internal controls relating to custody structures, valuation practices, and risks. There may be similar expectations from financiers, investors or others before funding the capital in the future for private companies.
In summary, external auditors are increasingly requesting supporting detailed documentation on virtual asset balances, transactions, and valuation supports.
Professionals should maintain complete audit files that can range from transaction histories -> custody confirmations -> valuation supports documentation -> and internal controls and procedures documentation.
Filing Taxes and Sharing Information across Borders
The OECD Crypto-Asset Reporting Framework is a key area of global tax transparency, and that will impact U.S. practitioners who have clients engaged in cross-border virtual assets. CARF provides a clear means of reporting and exchanging information regarding cross-jurisdictional virtual asset transactions.
More exchange of information cross-border would make transactions in virtual currency that take place on foreign exchanges or with foreign counterparties subject to automatic exchange of information from the tax administration. This has an effect on expectations of client secrecy, and requires practitioners to be aware of reporting obligations that may be above and beyond standard domestic tax compliance.
For clients who are conducting international activity in virtual assets, the compliance risk will be heightened, and numerous jurisdictions may seek rights to tax or report for similar transactions. Practitioners should be aware of how cross-border use of virtual assets could lead to increased compliance obligations, documentation, or reporting obligations from a nation.
Conclusion
Alternative assets have gone from alternative investments to becoming substantial options in the minds of bookkeepers, accountants, and U.S. financial advisors working with mixed portfolios of clients. This enabling legislation is continuing to develop, and additional standards by FASB, IRS, and SEC present opportunities and obligations for financial services firms. Instituting formal accounting processes, revised documentation standards, and appropriate internal controls will help practitioners reduce the risks of noncompliance and efficiently service their clients in this growing, diverse area. Blockchain accounting companies that desire end-to-end solutions to facilitate the accounting of clients’ digital assets should consider state-of-the-art practice management solutions to deal with modern accounting issues. Magicbooks offers systems and technology that can alleviate the digit asset accounting processes and improve the way you service your clients. Reach out at Magicbook to explore how technology can enable your practice to evolve in the age of digital assets.
