The SEC, the Financial Crimes Enforcement Network (FinCEN), and the IRS have all issued some form of regulation regarding digital currencies in the last few years. The main problem with regulating currencies such as bitcoin is that it is treated as both a method of payment and an investment property. FinCEN’s Guidance FIN-2013-G001 declared that “virtual currency does not have legal tender in any jurisdiction” (“Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies,” Mar. 18, 2013, http://bit.ly/2q4JOyG). The way to get around this is by converting the bitcoin into legal tender, just as Overstock.com does when it accepts bit-coin from its customer. The consumer is essentially using an investment, bitcoins, to buy a product, but rather than treating it like an exchange of property, the third party’s conversion of the virtual currency makes it an ordinary business transaction. This leads to major reporting issues for bookkeeping and tax purposes. If virtual currency is not real currency, the IRS says, then it must be treated as property for tax purposes. That means a capital gain or loss should be recorded as if it were an exchange involving property. It should be treated like inventory if it is held for resale, and therefore an ordinary gain or loss recorded. If it is used as payment, it should be treated like currency, but must be converted and its fair market value checked on an exchange (Chris Gaetano, “IRS: Treat Virtual Currency as Property, Not Currency, For Tax Purposes,” The Trusted Professional, Apr. 22, 2014, http://bit.ly/2qG1PoE). This ruling is also contradictory; it states that virtual currencies can be treated like real currencies in certain circumstances. Bitcoins received as payment to an employee would be considered wages; payment to an independent contractor would be subject to self-employment tax. If a bitcoin is bought on an exchange and then used to buy a product, the sale is treated like a barter transaction, and the gain or loss is the difference in basis between the value of the product received and the value of the bitcoin at that time. From the perspective of a corporate officer, the situation is even more complicated. Unlike with taxes, where an asset must be sold before it is recognized, the receipt of a bitcoin or other virtual currency must be recorded. Furthermore, because bitcoins are treated like real currency, their exchange rate at the balance sheet date must be considered and adjusting entries must be made to reflect conversion to U.S. dollars (Pierre Rochard, “Bitcoin for Accountants,” Live and Learn: MPA Student Life Blog, Feb. 6, 2013, http://bit.ly/2q1vO9L). Virtual currency transactions are also creating new challenges for auditors. The technological complexities can affect a company’s internal controls, as well as increase the risk of material misstatement on the financial statements. This was indicated by AU section 314.27, “The Standards of Fieldwork, Appendix C: Conditions and Events”: “Inconsistencies between information technology and the business as well as changes to the IT environment may indicate a risk of material misstatement in the company’s financial statements.” Evidence of a bitcoin transaction is recorded on a digital public ledger called a blockchain; this can get very technical, depending on how many transactions there are and the number of addresses for each. Regarding the value of these bitcoin transactions, auditors may compare the balances of the digital currencies the company holds in reserves to actual customer balances. This method is known as the Merkle Tree Technique and was created by Greg Maxwell, a bitcoin developer, specifically to audit bitcoins (Nermin Begovic, “Kraken Bitcoin Exchange Passes ‘Proof of Reserves’ Cryptography Audit,” Coindesk, Mar. 24, 2014, http://bit.ly/2r19CAn). http://www.cpajournal.com/2017/06/30/regulation-rise-bitcoin-gains-popularity/
