Crypto Protections: Thinking Future Risk & Defensive Documentation.

• Author: Klein, Ron
• Position: TechTalk

"Hope for the best, plan for the worst," is a very sound risk management approach. When it comes to your client being exposed to cryptoasset risk, plan for the worst is necessary. No one at CAMICO, or anywhere else, knows to what extent cryptoassets will suffer a crash in value. What we at CAMICO do know is, if it happens, your clients are likely to wonder why their CPA did not warn them. Remember, 36 years of jury research and experience informs us that the CPA's job, in the eyes of the jury, is to "advise of financial opportunity and warn of financial risk."

Risk Management Fundamentals: Prioritize 'Proactive Documentation' Proactive documentation, sometimes referred to as defensive documentation, is the first line of defense in any claim scenario. When there's no accurate written description of the terms and conditions of an engagement, claimants can more easily assert the CPA was responsible for providing services the CPA did not consider part of the engagement and guaranteeing the success of whatever transaction claimants initiated while the CPAs services were engaged.

Therefore, it's critical engagement letters include a clause regarding the IRS's reporting requirements for virtual assets and to clarify a client's responsibility to provide the CPA with the necessary information.

CAMICO suggests the following language be added to engagement letters for all individual tax clients, whether invested in cryptoassets (directly or indirectly), and all other clients known or suspected to be invested in cryptoassets:

"Please note the IRS considers virtual currency (e.g., Bitcoin) and other digital assets (e.g., non-fungible tokens or NFTs) as property for U.S. federal tax purposes. As such, any transactions involving cryptoassets or transactions that use or exchange virtual currencies are subject to the same general tax principles that apply to other property transactions. If you had any cryptoasset or virtual currency activity during the tax year, you may be subject to tax consequences associated with such transactions and may have additional foreign reporting obligations.

"You agree to provide us with complete and accurate information regarding any transactions in cryptoassets or transactions using any virtual currencies during the applicable tax year. Please ask us for advice if you have any questions. If you require additional consulting services to evaluate the specific treatment of digital assets or virtual currency and we agree to...