Six Things you need to know about cryptocurrency

It's the latest and greatest trend.  Cryptocurrency!  But what exactly is it and what do you need to know regarding the accounting and tax implications of investing in it?  Here are the six most important things you need to know about cryptocurrency:
1. Know the types of cryptocurrency. You may have heard of the most popular names of cryptocurrency, such as Bitcoin, but you need to understand there are very distinct uses for cryptocurrency. These include:

• As a payment mechanism:  Cryptocurrencies like Dash and Bitcoin Cash are focused on low transaction fees and rapid payment confirmations to compete with current payment alternatives.  They want users to purchase goods and services using their cryptocurrencies.
• As a store of value:  Cryptos like Bitcoin and Litecoin are focused on providing an alternative to investing in gold or silver or even traditional savings accounts. They are theoretically deflationary (a fixed amount can ever be mined) which makes them more similar to a precious metal than a government-issued currency. They seem to want users to buy and hold (or if you are cool buy and HODL).
• As a solution to a business issue: The cryptocurrency Ripple for example is an alternative to SWIFT payments – a type of interbank transfer. Ripple is running a private blockchain in partnership with some major banks to be able to charge consumers fractions of pennies for international payments, which cost consumers around $30 using the legacy SWIFT network.
• As a gift card replacement: Ethereum’s ERC20 token protocol has enabled thousands of companies to raise money in token sales, which amount to Kickstarter campaigns or gift card issuances. Consumers literally can use the tokens for the services these companies are planning to launch in the future.    

In the short-term speculators and cryptocurrency exchanges are defining the value of cryptocurrencies, but ultimately many believe the values will fall back to the fundamentals of the individual cryptocurrency. 
2. Liquidity of cryptocurrency.  There are only about 200 cryptocurrencies that you can get to cash via the reputable exchanges and most of those require two trades using two different exchanges. Only about 10 cryptos have enough volume to be able to transact without moving the spot price which makes moving larger amounts sometimes expensive.
3. How much to invest or convert. From accepting payments to maintaining value, businesses often ask, “How much?” The top wealth managers say that, even for the most aggressive risk profile investor, you should be putting less than one percent of your net worth into cryptocurrency.  
4. How to treat cryptocurrency for accounting.  The most common practice is booking cryptocurrency as current assets, following the IRS guidance that cryptocurrency is property.
Also gains and losses must be recorded on all crypto to crypto or crypto to cash exchanges. The official guidance on the tax liability of transactions using cryptocurrency was issued by the IRS in 2014, so there will likely be more guidance in the next few years as cryptocurrency increases in popularity and usage.
5. The best way to “store” cryptocurrency. The more value clients have in cryptocurrency, the more secure their storage should be. However, this type of asset is digital, so how exactly should it be stored? The short answer is anything other than a cryptocurrency exchange.
Better options include a hardware or software cryptocurrency wallet:

• Hardware Wallet: The best practice for people that have significant holdings is a “hardware wallet” - a specialty device that plugs into your computer like a USB device. Popular options include Trezor and Ledger. However, it is worth noting that the hardware wallet hard drives are ultimately produced and sold by a third party, so they are not entirely without risk. If your clients’ private hard drive or hardware wallet has a substantial amount of value in cryptocurrency, advise them to keep those hardware wallets in a safety deposit box.
• Software Wallet:  This is a bitcoin application that sits on your computer's hard drive and gives you total control and excellent security, as each bitcoin you hold is only accessible on your own computer. Those who are more technical might prefer the software wallets like Gnosis or Parity, but the user interface really only makes those viable for the true techies out there. 

6. How businesses accept cryptocurrency. "What do you do if somebody asks you to pay in cryptocurrency?" is a common question. There are two options for early adopters: accept the actual cryptocurrency or get a merchant processor for the cryptocurrency.
There are a few merchant processors available that convert cryptocurrency transactions into cash. The most popular Bitcoin processor is called BitPay. With processors, if you haves an online store, your customers can pay with Bitcoin and you will receive cash based on that day’s Bitcoin price. This means they would not be subject to the volatility of the cryptocurrency value.

Shoutout to Matthew May (@TheTechCPA)​

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