{"id":29606,"date":"2023-06-30T08:00:00","date_gmt":"2023-06-30T13:00:00","guid":{"rendered":"https:\/\/taxprocenter.proconnect.intuit.com\/?p=29606"},"modified":"2023-06-27T14:36:19","modified_gmt":"2023-06-27T19:36:19","slug":"best-practices-in-cryptocurrencies","status":"publish","type":"post","link":"https:\/\/accountants.intuit.com\/taxprocenter\/tax-law-and-news\/best-practices-in-cryptocurrencies\/","title":{"rendered":"Best practices in cryptocurrencies"},"content":{"rendered":"\n

As a tax and accounting professional, you will encounter clients who require guidance regarding investing in cryptocurrencies<\/a> and digital assets. Here are some best practices to follow when advising clients involved in cryptocurrencies.<\/p>\n\n\n\n

Understand the liabilities and limitations<\/strong><\/p>\n\n\n\n

Crypto investment is risky. Therefore, the foremost responsibility is to make your clients aware of the limitations and liabilities of investing or trading in cryptos. Here are some limitations<\/a> of cryptos everyone should know.<\/p>\n\n\n\n

Volatility:<\/strong> Cryptocurrencies are volatile, with prices fluctuating by the minute. Bitcoin crossed the threshold of $1 in April 2011. A decade later, it was more than $6,000 in Oct. 2021. And as of the time of this writing, one Bitcoin is around $20,000. Trading in cryptos is risky because tangible assets do not back them.<\/p>\n\n\n\n

Unregulated:<\/strong> Cryptocurrencies are not regulated and banned in some countries. Your clients should know their position in their respective countries. Otherwise, they might risk losing their investments.<\/p>\n\n\n\n

Changing technology:<\/strong> One must contend with changing technologies when handling cryptocurrencies. Technology changes can necessitate protocol changes, causing significant interruptions in regular operations and the price of the coin.<\/p>\n\n\n\n

Scalability:<\/strong> Scaling is one of the prime concerns of trading in cryptos. Infrastructure limitations exist, and technology needs more advancements to address such issues.<\/p>\n\n\n\n

Security:<\/strong> While blockchain technology is considered safe, cryptocurrency trading and decentralized finance<\/a> (DeFi) platforms are vulnerable to malicious actors that can exploit smart contract code and cause heavy losses for users.<\/p>\n\n\n\n

Help your client assess their risk profile<\/strong><\/p>\n\n\n\n

Evaluating the client’s risk profile<\/a> is crucial for any crypto investment. As a tax and financial planning professional, you can help your clients think strategically to balance the potential return on crypto investments with its potential risks. The following three risk factors play a critical role:<\/p>\n\n\n\n

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  1. Risk capacity:<\/strong> One should only invest as much in crypto as one can afford to lose.<\/li>\n\n\n\n
  2. Risk requirement:<\/strong> Make the client understand the risks involved in any crypto investment.<\/li>\n\n\n\n
  3. Risk tolerance:<\/strong> This measures how much risk or losses the client can tolerate psychologically. It’s easy to be overly confident in a bull market, but are they prepared for the seasonal downturn?<\/li>\n<\/ol>\n\n\n\n

    Open discussions about a client’s risk profile are a key part of advisory<\/a>. The goal is to help clients think through a game plan for best- and worst-case scenarios.<\/p>\n\n\n\n

    Understanding client goals<\/strong><\/p>\n\n\n\n

    Many people invest in crypto because they find their friends and neighbors making money through crypto investments, while others might have different objectives. Tax and accounting advisors must understand the client’s goals:<\/p>\n\n\n\n