Whose inspiration would you follow about the current Bitcoin windfall and frenzy? Do you think “A Change Will Do You Good” as Sheryl Crow’s music lyrics might suggest, or follow the recommendation of The Steve Miller Band to “Take the Money and Run?” Obviously there is a wide range of opinion based upon your individual viewpoint and the increased awareness regarding virtual currency (sometimes referred to as cryptocurrency).
Why are virtual currencies creating so much excitement? Interestingly, one reason could be a result of Wall Street recently receiving its initial exposure to Bitcoin with the first-ever futures contract going to market and making it more well known.
As a brief overview: virtual currency is a digital asset designed to convert goods and services using cryptography, and it is not backed by any government. The appeal of this medium of exchange varies and continues to be speculative at best.
Some feel it offers a greater degree of security than more typical cybersecurity measures in combatting identity theft and fraud for reasons such as:
- Elimination of seizure by third parties by having multiple redundant copies of the transactions in a database.
- Current inability of implementing a virtual currency tax system since third parties cannot intercept the transaction.
- Reduction of chargebacks as transactions cannot be reversed.
Some skeptics about virtual currency provide the following reasons:
- With virtual currency being unregulated, market manipulation could occur based on parties who have a large financial interest. This itself could promote fraudulent activity.
- It’s too difficult to determine its valuation since they lack a benchmark and have no earnings.
- As an alternative and dominating means of exchange, how do financial institutions exit the currency business?
This is a relatively new frontier and asset in the form of an exchange medium. To optimistic individuals, virtual currency may seem exciting and innovative. Others may dismiss it as a significant risk due to its volatility. Regardless of your perception, it is becoming increasingly more popular among individuals and businesses.
The fact that Congress has introduced a bill known as The CryptoCurrency Tax Fairness Act tends to imply there is some legitimacy of these virtual currencies. Who would have thought virtual currency could now be a part of someone’s holiday wish list this year?
Having a certain amount of professional skepticism along with the openness to accept new beliefs is a necessary balance for us to remain unbiased trusted advisors. As CPAs, we have to begin understanding how to address the accounting, tax and auditing methodologies that need to be considered. What factors will you reflect upon when an individual or client asks your suggestions on virtual currency transactions?