It was late November 2019, and I had just won a TechStars competition at Nipsey Hussle’s Vector90 in Los Angeles. I was excited about winning, but I was even more excited that I had passed my ethics exam, the last step before applying to become a CPA. Thirty minutes before the post office closed, I arrived to send off my official application with a $50 application fee. The postal worker swiped my card and, to my horror, she said with empathy, “I’m sorry, this card has been declined. You should call your bank.”
I checked my bank phone app and saw that the balance was above the total cost of the money order. It must have been a glitch — what could be going on? My mind raced as I thought about what could be causing this issue. I called the bank, and they informed me that they had closed my account without my knowledge and that I would receive a check within 10 to 14 business days.
When I asked her why my account had been closed, she said she couldn’t tell me. I never found out why. This put me in a very peculiar situation. When would I finally become a CPA? The joy of winning TechStars was over.
I realized then that the value of bitcoin was not in the US dollar amount but in the decentralized utility. Bitcoin allows for transactions without an intermediary, for a low cost, and quickly. Not having a middleman, such as a bank or government, prevents accounts from being shut down—like what happened to me—since the technology allows everybody, including the unbanked and underbanked, to participate.
What Is Hyperbitcoinization?
Hyperbitcoinization is defined as the moment when bitcoin becomes the world’s dominant form of money. People will value bitcoin more than fiat currency or precious metals when this happens. This could occur if there is a monetary crisis caused by central bank policies or because people will increasingly use bitcoin as a payment system. Even so, CPAs will need to learn the ins and outs of digital assets quickly or get left behind, similar to those who have yet to adjust to the internet.
Hyperbitcoinization would have an enormous effect on the taxation of virtual currencies across the board and would result in a massive change for businesses across the globe. The Financial Accounting Standards Board has already begun adjusting accounting standards concerning digital assets such as bitcoin.
As a CPA, I most value the technology behind cryptocurrencies, blockchains, which are databases that function as general ledgers for cryptocurrencies. The bitcoin blockchain is an open source blockchain that allows for decentralized participation in keeping the software trustless. In contrast, a central bank digital currency blockchain would be controlled by a central bank. Bitcoin evangelists see bitcoin as the way to escape a currency controlled by the government. Whether government or the people, blockchains are changing money and the way to account for it.
FASB and Digital Assets
As digital assets grow in popularity, there needs to be more guidance from regulatory bodies. The
FASB views digital assets as intangible assets accounted for using the historical cost method. The FASB’s primary purpose is to establish and improve generally accepted accounting principles within the US for the public’s interest. At a FASB Board Meeting on Oct. 12, the accounting for digital assets on the balance sheet was voted to change from the historical cost method to fair value measurement.
This rule change could hugely affect the adoption of digital assets, particularly bitcoin. Using the historical cost method, CEOs were disincentivized from adding digital assets to their balance sheet. If the asset price increased, they could not show any profit on the income statement; however, if the price went down, they were forced to take an impairment loss. The fair value method will include both profit and losses in the financial statements.
A corporation’s goal is to bring shareholders profits. If the corporation is taking losses without the possibility of a profit, then the CEO and other decision-makers could be terminated. Why take that risk if you are a decision-maker? More important, the historical cost could drastically undervalue a company that invests in digital assets if those assets increase drastically.
IRS and Digital Assets
The IRS collects federal taxes and enforces the Internal Revenue Code. Over the last several years, the IRS has increased its attention on digital assets, and the rules are constantly evolving.
In March 2014, the IRS released a publication Notice 14–21 that “virtual currency is treated as property” and “not treated as currency.” Although the IRS didn’t address virtual currencies again for five years, the 2017 Tax Cuts and Jobs Act affected investors drastically. Using like-kind exchanges for virtual currencies was no longer allowed, and when losing assets, one could no longer deduct them as casualty losses.
In 2019, the IRS released Revenue Ruling 19–24, which clarified specific topics such as airdrops and forks. Also, in 2019, on schedule 1 of the 1040 personal tax returns, the agency added the question, “At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?” This question, slightly adjusted, has since been moved to the front page of 1040 for tax years 2020 and 2021. There are talks that a 1099-DA form may be required from exchanges to provide investors.
The Future
A CBDC is a digital asset that a central bank issues. On Sept. 16, the White House released the framework of a US CBDC. A CBDC could automate and simplify the tax process. All transactions would be controlled by a central entity, and, in theory, taxes could automatically be taken from individual transfers instead of a yearly tax return.
With a US CBDC looming, the adoption of bitcoin increasing, and regulations becoming more apparent, businesses, governments, and CPAs will need to adjust accordingly. Only time will tell how hyperbitcoinization will affect taxation and business practices, but this event will significantly impact our future.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Charles J. Kelly, CPA is an entrepreneurial-focused CPA with a focus on cryptocurrency and educating the general public. You can follow him on Twitter at @cjthesmartguy.
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