In today’s newsletter, Ganna Vitko, president of the Toronto Women in Crypto Chapter, walks us through the accounting rules in place for digital and crypto assets and some of the challenges of dealing with these new assets.
Then, on Ask an Expert, Aaron Brogan of Brogan Law answers questions about token issuance and its tax implications.
– Sara Morton
Accounting and auditing challenges for crypto funds: a look at EU and US markets
The cryptocurrency market poses significant challenges for auditors and accountants in all jurisdictions. These are some of them.
What to know:
- Since digital assets do not fit neatly into the existing Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) frameworks, there is much uncertainty around their classification, valuation and disclosure in both the EU and the US.
- While the EU slowly moves toward better standardization through new regulations, the United States continues to rely on interpretive approaches.
- All of this leaves auditors, accountants and fund managers facing greater inconsistencies and risks.
The financial industry has undergone an extraordinary metamorphosis in the last decade. As digital assets are becoming full-fledged parts of the financial ecosystem, all market players have had to adapt to new circumstances.
No one has had it harder than auditors and accountants. Specifically, conventional auditing and accounting practices, based on traditional financial instruments and trusted infrastructure, are not sufficient to cope with the ever-changing world of digital wallets and distributed ledgers.
Below, we will look at some of the most common challenges that auditors and accountants face, both in the US and the EU.
The core of the issues
At the heart of cryptocurrency accounting and auditing problems lies a fundamental mismatch: digital assets simply do not fit into long-established frameworks. For example, under US GAAP and IFRS, assets are grouped into clearly defined categories, such as cash, securities, derivatives or intangibles.
However, cryptocurrencies defy such simple classifications. Are they financial instruments? Intangible assets? Or should they be viewed as inventory? Despite recent attempts, not many jurisdictions have managed to fully define them.
This lack of clarity has several negative effects, as it determines how cryptocurrency holdings are validated, when impairments are recognized, and how gains and losses are actually recorded in financial statements.
Regulatory pressure and enforcement trends
We have to note that this accounting and custody ambiguity is developing in an environment where regulatory scrutiny is at an all-time high. While not all SEC enforcement actions relate directly to auditing or cryptography failures, recent data on accounting and audit compliance offers a useful window into the compliance conditions under which digital asset funds now operate.
The data in the table above reveals a notable change in law enforcement dynamics. On the one hand, it is clear that the number of defendants in accounting and auditing cases decreased in fiscal year 2024. However, average settlement amounts increased significantly, especially for individual defendants. This pattern points to a shift away from broad-based law enforcement and a move toward fewer cases with higher financial risks. That, in turn, increases the personal and professional risk for everyone involved.
On the other hand, Europe is moving along a markedly different path. As the Markets for Crypto Assets (MiCA) enter gradual implementation and supervisory coordination is strengthened across member states, the emphasis is slowly shifting towards formalized compliance frameworks and standardized reporting obligations.
Therefore, there is a contrast in the regulatory mechanics between these jurisdictions. In the United States, the intensity of law enforcement ebbs and flows with policy direction and case selection. On the other hand, EU codification advances through structured legislative harmonization. Both dynamics shape the governance environment in different but consequential ways for both crypto fund managers and their auditors.
Looking to the future: best practices and innovation
Amid regulatory and technical uncertainty in the EU and US, market participants are doing their best to proactively adopt best practices. They include:
- Periodic certification of reserves by third parties
- Independent valuation providers using pricing from multiple exchanges
- Improved internal controls over crypto operations
- Investment in audit technologies that leverage blockchain analytics.
Auditors and accountants themselves are expanding their skills and partnering with specialists, which is a big step in the right direction.
Conclusion
At the moment, the accounting and auditing of crypto funds is at a crossroads. Issues such as fragmented regulation, volatile markets and new custody arrangements are challenging legacy financial frameworks. In the EU, new regulations signal progress toward better harmonization, while the United States continues to rely heavily on creativity and interpretive approaches.
For both auditors and accountants, navigating these waters requires more technical knowledge and active engagement with all emerging directions. In the end, things will improve once new improved frameworks emerge. Only they can improve transparency, reduce risk and support sustainable growth in the crypto fund ecosystem.
– Ganna Vitko, President of the Toronto Women in Crypto Chapter
ask an expert
Q. My client is considering flipping a meme coin. What should they take into account?
The SEC has provided guidance that it does not consider certain “meme coins” to be securities. If a customer wishes to sell these tokens, they should be aware that the tax treatment of meme coin sales is not equivalent to an offering of exempt securities. IRC § 1032 says that income from stocks is not taxable income, but it is a legal creation with no cryptographic analogue. If your client sells meme coins, you may have to pay ordinary income tax.
Q. How might this change in the future?
There has been a push among crypto law professionals, such as Miles Jennings, to refocus cryptocurrency projects. However, many projects prefer to bid abroad, in part to try to avoid the tax burden of issuing in the United States. Taxes are a hot political topic among crypto lobbyists in Washington, DC, and a solution to the issuance conundrum could be the subject of future legislation.
– Aaron Brogan, Managing Attorney, Brogan Law
