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Crypto: Thinking Future Risk and Defensive Documentation

“Hope for the best, plan for the worst” — 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 whether 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 is no accurate written description of the terms and conditions of an engagement, claimants can more easily assert the CPA was responsible for:

1) providing services the CPA did not consider part of the engagement, and

2) guaranteeing the success of whatever transaction claimants initiated while the CPA’s services were engaged.

Therefore, it is 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. (Refer to CAMICO’s tax engagement letter templates on the Members-Only Site under the Engagement Letter Resource Center).

CAMICO suggests the language below be added to engagement letters for the following clients:

a) all individual tax clients, whether invested in cryptoassets (directly or indirectly)

b) all other clients known or suspected to be invested in cryptoassets

Sample Engagement Letter Language:

Please note the Internal Revenue Service (“IRS”) considers virtual currency (e.g., Bitcoin) and other digital assets (e.g., non-fungible tokens “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 [year] 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 perform such services, such services will be covered under a separate engagement letter.

In addition, for those clients who have known virtual asset transactions, it may be prudent to also have them sign a tax representation letter or a stand-alone certification letter at the conclusion of the engagement that includes language addressing cryptoassets. (Refer to CAMICO’s letters on the Members-Only Site under Knowledge Tree, CAMICO Publications, IMPACT, 2022, IMPACT 121). The additional defensive documentation provides support and evidence of clients’ understanding and acceptance of their responsibilities with respect to virtual asset transactions and the limitations of the services the CPA is providing.

Educate your clients.

CAMICO suggest the best way to inform clients of the risks and the tax consequences of cryptoassets are to provide a robust written client communication.

A limited example of such a communication may include the following:


Directly or indirectly investing in cryptoassets involves significant risks that should be seriously considered. As an investor, some of the risks to consider include:

  • Cryptocurrencies are speculative because they have no intrinsic value, and their market value is based on a high level of uncertainty and dependent upon investor confidence. Many commentators believe that a crash in value is inevitable.
  • The virtual asset marketplace is largely unregulated and investments in cryptoassets are not insured by any government agency. Transactions are irreversible, anonymous, and occur in any location around the globe.
  • Transactions occur instantaneously — there are no “gatekeepers” so anyone can download the associated software.
  • There may be periods of illiquidity.
  • There is a significant risk of theft of cryptoassets through fraud or cyber-attacks with little or no recourse for the victimized investor.
  • There are specific tax rules regarding virtual asset transactions.

Your client communication should also include some “call to action.” For example, you could include the following: Please advise us if you are investing in any cryptoassets or whether you have taxable or sales transactions or exchanges using virtual assets.

Download CAMICO’s suggested and simple way to warn your client base about crypto risk with a client notification letter. Click on the link to download the sample template:

Additional Risk Management Steps for CPA Firms

  1. Get educated and stay current on the rules and risks associated with virtual and other cryptographic assets even if you refer the client to a specialist outside the firm. Risks will likely continue to escalate as new virtual investment opportunities arise. For example, you may have a client who has invested in NFTs. These are unique cryptographic assets (tokens), like a one-of-a-kind baseball card and can be anything digital such as drawings, music, and digital art. Understanding what a NFT is, how NFTs work, what sort of software tracking is available for recording the sales and purchases of NFTs, are just a few of the uncertainties CPAs need to address if they have clients entering into this new cryptoasset community.
  2. Don’t dabble. As you can imagine, crypto is a whole new world of possibilities but also potential liability risks for CPAs who dabble — tread carefully, arm yourself with knowledge and know your limitations.

CAMICO policyholders with questions regarding this communication or other risk management questions should contact the Loss Prevention department at lp@camico.com or call our advice hotline at 800.652.1772 and ask to speak with a Loss Prevention Specialist.

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