As I’ve met with hundreds of lawyers, accountants and financial professionals over recent months, I’ve had many discussions about the challenges being faced by clients as they forge new ground in the digital currency economy. The following are a sample of the client issues and concerns that our members shared with me and that they are providing advice on today.
Regulatory Compliance: As state and federal laws are hastily drafted to address Bitcoin, clients are requiring advice on how to comply with these laws, as well as the rules and regulations promulgated under them, if and as enacted. Many of these new laws are quite opaque or overreaching and require counsel on how to best work within their requirements for licensing, disclosure and customer identification, among others.
Liability Claims: To date, there are few cases, statutes or precedents that establish liability in case of Bitcoin loss or privacy breaches. Lawsuits being brought by our members and arising from Bitcoin use are breaking new ground in the area of negligence and commercial transactions.
International Finance: As Bitcoin becomes more popular for international exchange and finance, our members find themselves counseling clients on conflicting legal frameworks in different international jurisdictions. These issues complicate cross-border business that uses Bitcoin for payment. Most recently enacted guidelines at the international level are geared toward preventing illicit use, rather than providing a framework for legitimate trade.
Taxation and Cost Basis: The IRS guidelines on the tax status for digital currency mean that accountants are being tasked with tracking gains and losses for clients. Since Bitcoin is classified as a capital asset in the US, capital gains tax rates apply depending on basis and the length of time from purchase to sale.
Reporting and Record Keeping: Related to taxation is the need to report each transaction and keep records of Bitcoin values. While this may be difficult to track in some cases, the requirement is clear and it is likely the IRS will step up scrutiny of transactions in the coming years. Some members are utilizing software developed specifically for Bitcoin recordkeeping for much of this work.
How to Invest in Bitcoin: Financial advisors are being asked about how to actually invest in Bitcoin, as well as how to hold that investment in a secure way. Should one invest into the currency itself, into a vehicle that holds the currency or perhaps into companies in the digital currency ecosystem?
Price Volatility: The price of Bitcoin has fluctuated a great deal. Clients want to know how to capitalize on that volatility and manage their expectation of return. The factors affecting price and volatility are being evaluated as best as possible by traders and long-term investors alike.
Investment Risk Profile: The actual risk of holding Bitcoin can be affected by many factors, all of which are being considered by our members who provide financial advice to their clients. In many cases, there is no recourse or insurance available to compensate for losses so advisors are identifying and recommending secure storage options and other means of mitigating the risk.
Tax Strategies: Because of the capital gains tax treatment, investors are asking our members how to select the optimum time frame and vehicle to ensure maximum tax efficiency. Financial advisors are collaborating with accounting professionals to provide optimum coordinated advice in the best interests of their clients.
Leveraging a Professional Network
Obviously, these issues are just a sample of the many issues that have presented, and will continue to present, themselves to our membership. Further, many of these issues overlap between professions, which is why it is wise for professionals to have ready access to their peers in adjacent fields who have digital currency expertise.
The Digital Currency Council is an excellent forum for fostering such a network that can be leveraged to meet client needs in the digital currency economy.
* The Digital Currency Council (DCC) does not advocate on policy matters. Any policy positions taken by David Berger are his personal positions only and do not reflect the position of the DCC.