David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation, forensic accounting, and marital dissolution services in Philadelphia and the Delaware Valley.
In my 2017 blog on cryptocurrency, I discussed the risks involved with Bitcoin and other cryptocurrencies. At that time, only a few U.S. companies were accepting cryptocurrency as payment, and there were significant fraud and investment risks in cryptocurrency transactions. In my 2019 update on the fraud risks of cryptocurrencies, I reiterated these risks along with the increased risks of hacking attacks against digital wallets, private keys, and exchanges.
In the past two plus years, cryptocurrencies have become more popular than ever. In fact, as of today, cryptocurrency transactions are considered legal in most countries in the world (notable exceptions are Turkey, which banned cryptocurrency transactions in April 2021, and China which banned cryptocurrency transactions in September 2021). Two countries – El Salvador (June 2021) and Cuba (August 2021) – recognize cryptocurrencies as legal tender, and this is expected to grow in 2022.
Additionally, the financial community is getting on board with cryptocurrencies. In early 2021, Morgan Stanley announced that they were going to be offering to their wealthier customers funds which invested in cryptocurrencies. BNY Mellon announced that it would provide custodial services for cryptocurrencies.
Additionally, Ally Bank, Chime Bank, Simple Banks, and USAA allow customers to purchase Bitcoin through their debit cards. Goldman Sachs has opened a cryptocurrency trading desk. In April 2021, Venmo added support for customers buying and selling cryptocurrencies. In October 2021, Mastercard announced it will be building a platform to allow any bank or merchant to offer cryptocurrency services. Additionally, cryptocurrencies can be used for retirement investments including IRAs, Roth IRAs, and certain 401-Ks.
Currently, the American Red Cross, UNICEF and the UN World Food Program accept donations in cryptocurrency.
Notwithstanding the above, risks still abound with cryptocurrencies. These include:
- Cryptocurrencies are still subject to extreme price swings, making them risky investments. For example, in 2021, Bitcoin’s price ranged between a low of $28,722 and a high of $68,789. Additionally, significant swings can occur instantly due to certain world events. For example, when China announced its ban on cryptocurrencies in September 2021, Bitcoin immediately fell in value by 9% (it has recovered and more since then).
- Digital wallets, private keys and exchanges are still subject to hacking attacks.
- Commissions and fees for investing in and cashing out from cryptocurrencies are still significant. Additionally, there may be withdrawal limits for cashing out.
- Gains and losses from cryptocurrency transactions must be reported on your Federal and other income tax returns.
Additionally, the recently passed Infrastructure Investment and Jobs Act added certain reporting requirements. Beginning in 2023, cryptocurrency exchanges and other transaction facilitators will have to track and report on their customer’s cryptocurrency transactions (similar to what your mutual funds and brokers/investment advisers currently do for securities transactions).
Also, starting in 2024, anyone receiving more than $10,000 in cryptocurrency for a product or service will have to report identifying details about the customer (including social security number) just as they currently are required to do for cash transactions over $10,000. A check box has also been added to Federal income tax returns requiring the taxpayer to declare whether they’ve transacted or had a financial interest in a virtual currency.
Finally, the yet-to-be passed Build Back Better bill may be closing the ‘”wash sale” loophole for cryptocurrencies which currently allows a taxpayer to take a write-off of a loss even if they buy another cryptocurrency within 30 days before or after a sale.
I will continue to monitor cryptocurrencies and keep you updated.
About David Anderson & Associates
David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley. The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support, economic damage analysis, business consulting and outsourced CFO services. Company principal David Anderson is a forensic accounting expert in Philadelphia who has more than 30 years of experience in financial and operational leadership positions and is a Certified Public Accountant, a Certified Valuation Analyst, and a Certified Fraud Examiner in Philadelphia.
If you require the services of a Certified Valuation Analyst in Philadelphia or any other forensic accounting services in Philadelphia and the Delaware Valley, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.
