Digital assets have increased in popularity and demand as more people invest in non-fungible tokens (NFTs), cryptocurrencies, security tokens, digital animations, stablecoins, and more. For federal tax purposes, digital assets are treated as property, which presents new opportunities and complexities for tax practitioners.
When working with clients who use digital assets, asking the right questions allows tax practitioners to gain an in-depth understanding of a client’s situation and provide personalized advice to mitigate risks.
How a client interacts with digital assets varies
From mining assets to investing, trading, or staking, you want to be aware of nuances and know how each role is filed under tax codes. Varying engagement with digital assets has different related risks — a trader’s cryptocurrency account has fewer risks than a miner who may be mining in a different state than where the miner is located. To add to the complexity, different kinds of assets have different associated rules within the tax code.
Before working with a client’s digital assets, you need a lot of background information to fully understand the situation and services needed; this requires asking in-depth questions to each client.
Clear questions lead to insights about digital asset ownership, digital asset ventures, investment and transfer activities, and reporting and recordkeeping.
The Questionnaire for Individual Clients — Digital Asset Activities is your key as you consider new clients or continue discussions with existing clients. It’s interactive and enables clients or prospective clients to submit their responses to you to facilitate a robust conversation. By asking thorough questions, you can target your services to your clients’ needs and goals. Additionally, you protect your firm from potential risks.
"In order to effectively serve clients, and to hedge any potential risks to the practitioner and firm, it’s imperative for a practitioner to have an acute understanding of the digital asset activities potential clients are undertaking,” said Sarah Shannonhouse, CPA, and Manager, Tax Practice & Ethics — Public Accounting at AICPA® & CIMA®.
Feel empowered to ask how clients acquired digital assets
The answers gathered from the questionnaire can reveal not only helpful information and growth opportunities for clients, but also potential risks and areas of concern. Tax practitioners should feel empowered to ask how their client acquired digital assets, how many wallets the client currently has, and where those assets are being held.
With these answers, tax practitioners can approach each client interaction with full awareness and tailor services to meet the clients’ needs. Managing digital assets requires knowing the state of the client’s records, the tracking software used, and how actions like mining and staking were reported in previous tax returns — making a questionnaire an invaluable resource.
If the answers are insufficient, you can choose to reach out to your client and discuss additional details or, if necessary, to suspend the working relationship.
Engagement letters provide an additional layer of protection for each accountant and firm and enables the client to confirm that all the necessary information on the client’s digital wallets, transactions, and exchanges has been provided.
Each client interaction will be nuanced, and to help you navigate the tax complexities of digital asset reporting, the AICPA Tax Section has additional tax guidance and resources.
Manage digital assets with confidence
As the popularity of digital assets continues to increase, accurate tax reporting is vital. Clients will lean on your expertise to ensure their accounts are compliant and tax returns are properly filed. Posing in-depth questions to each client creates a solid foundation to help tax practitioners with overall digital asset management.
“Answers to questions around the quality and amount of virtual currencies and NFTs a potential client holds, how and when were they acquired, and if any tokens were received as rewards for staking or mining are just a sample of questions in need of answers that will help a practitioner determine the best engagement services they can offer for a client with digital asset investment activities," said Shannonhouse.
Boost client services and expand your digital asset expertise with the AICPA & CIMA Questionnaire for Individual Clients — Digital Asset Activities.