As cryptocurrency increases in popularity, many accountants find themselves facing questions from clients and colleagues on how to manage cryptocurrency assets, payments and associated tax implications.
If your clients are beginning to express interest in cryptocurrencies, here are five risks to review with them before they make any kind of investment:
1. Liquidity and Fiat Conversion
Your clients may not be aware that many types of cryptocurrency are a challenge to liquify and several types of cryptocurrency cannot be directly converted to fiat money. Instead, some cryptocurrency must first be converted to another type of cryptocurrency and then converted to fiat.
This will have a significant impact on the types of cryptocurrency your client might accept through their store or what they invest in on a personal level. Advise clients about the risk of investing too much of their savings or funds in illiquid options such as cryptocurrency.
2. Counterparty Risk (or placing cryptocurrency on exchanges)
To pay, trade or convert cryptocurrency, you typically use a cryptocurrency exchange to accomplish the task. It is important to ensure your clients know that such exchanges are non-regulated private companies.
In plain terms, this means there is some degree of risk in handing over funds. Ensure clients know they should never store their cryptocurrency on an exchange, but simply use the exchange to complete the desired task if needed.
3. Volatility Risk
Cryptocurrency prices can fluctuate, but it is crucial to know how pricing could impact business or personal finances. If your clients plan to begin accepting cryptocurrency payments for their business, they’ll need to be instructed on how to determine when to convert or cash out, or when to hold on to the cryptocurrency.
4. Transaction Fees
The expensive and volatile transaction fees associated with cryptocurrency are not widely known by everyday business owners or consumers. Depending on the cryptocurrency and the day, transaction fees could be one cent or $30 per transaction!
Each cryptocurrency can change their transaction fee as often or as dramatically as they want. If clients plan to accept cryptocurrency, they will need to establish a system to monitor transaction fees to avoid losing money on payment processing.
5. Storing Cryptocurrency
This is still a challenge. Your clients should be aware of two different cryptocurrency storage options and the risks associated with each one:
- Hardware Wallet: Cryptocurrency is stored on a specialty device that plugs into a computer, such as a hard drive or USB device. The risk with a hardware wallet is that it, too has counter-party risk because they are produced and sold by a private company and are not regulated. Hardware wallets can also be physically stolen or destroyed.
- Software Wallet: Here, an application stores cryptocurrency on a computer's hard drive. The risk with a software wallet is similar to standard computer storage risks: electrical, water or fire damage could render all computer files completely lost.
Ensuring you are up to speed on the latest cryptocurrencies, developers can help you become the best trusted advisor you can be. Clients will need your help to navigate the different types of cryptocurrency, the pros and cons of each, and the tax implications of cryptocurrency for business or personal finances. Good luck!