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What CPAs Need to Know about NFTs

October 21, 2021

Non-fungible tokens (NFTs) are coming to the forefront as key player in the digital currency market. But what are the accounting and tax implications? Cryptocurrency expert Joey Ryan, CPA, CFO at TrustSwap and co-founder of Gilded, joins host Dr. Sean Stein Smith, CPA, to discuss what NFTs are, whether they’re here to stay, and the challenges and opportunities they present for CPAs. 

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Episode Transcript

Sean Stein Smith: Welcome back to the NJCPA TechTalk Podcast. Back here for episode 10. Double digits, can you believe it? I can't. And our NJCPA podcast right here today is brought to you by the Emerging Technologies Interest Group. So I'm really amped here today for an excellent conversation on everything crypto, one, but actually trying to hone in on one aspect of crypto that really has become a hot, hot topic as of late. But first, a brief introduction on me. I'm your host, Sean Stein Smith. I do a ton of stuff: blockchain, crypto, everything IT from RPA, AI automation, blockchain, crypto, I'm very active in the space. Probably anybody tuning in has had to hear me, deal with me or interact with me somehow as it pertains to blockchain, crypto stuff.

But I won't bore you any more on that. I'm really, really amped to have today on the podcast, episode 10, double digits podcast episode, Joseph “Joey” Ryan, who is a colleague, who is a friend and a real expert in everything crypto. And so I'll hand it over to him for a quick background on himself, on his journey, from a normal audit-type person to a two-time CFO of actual crypto companies. Joey, happy to have you.

Joseph Ryan: Thanks, Sean. Yeah, always a pleasure being on with you. A friend, I like that we're at that level now.

Sean Stein Smith: Should I go back and take that out?

Joseph Ryan: No, no, no, that's great. Great. No, I'm glad that we air it all out here. So always great to be on with you and happy to be on and happy to share my crypto knowledge with all the CPAs tuning in. As Dr. Sean said, I am a CPA, former Big Four auditor, was in the public accounting realm for over 10 years before kind of diving into the crypto space, going down the proverbial crypto rabbit hole back in 2017, 2018 and haven't come out since. So I’m happy to share some of the knowledge that I've learned and talk about some of the hot topics that accountants are facing today with individuals and businesses that are coming to them with some of these issues that they're facing in the crypto space.

Sean Stein Smith: Absolutely. And so probably the opening question that I have for you is, how hard was it to pivot from being a Big Four auditor, a cog basically in the audit pipeline to becoming a co-founder of a firm, one, and then a co-founder of a firm, Gilded, that was really operating in a whole new area prior to current role at TrustSwap?

Joseph Ryan: Yeah. I mean, it's definitely a pretty large pivot. When you're, as you said, kind of a cog in a wheel at a Big Four, kind of living that proverbial Big Four life, gradually moving up the ladder, et cetera, dealing with clients, dealing with deadlines, kind of living that corporate life per se, and then kind of all of a sudden moving into the fast-paced ... And the Big Four and the public accounting life is definitely fast. So moving into an extremely kind of fast-paced, learn-as-you-go startup environment, that was kind of a huge, huge pivot/huge learning curve that I definitely had to undertake. But I felt like the opportunity had presented itself, the timing of the market had presented itself, and the timing of where I was at in my career was kind of right for me to make that move.

And, at the time, we had actually just gotten into an accelerator program that was up in New York City and it was a three-month program. And that program actually really helped me develop the necessary skillset to operate and learn how the startup environment truly works and operate at my peak efficiency in the startup environment. I would equate that kind of three-month accelerator that we were in, it's a Techstars accelerator, so similar to Y Combinator or the large kind of startup accelerator programs, those are crash courses in basically entrepreneurship. So you're getting kind of a three-month, if you want to say, a MBA or a graduate level course in how to be an entrepreneur.

And that really helped, again, develop those skills that I needed then and have been using since then to co-found and bring Gilded to where they're at today — and now working as a CFO and helping guide TrustSwap into the future to be the kind of all-in-one platform for businesses and individuals to be able to transact and utilize digital currency going forward. So, with that said, yeah, big pivot, but like I said, the opportunity presented itself and I was at a time in my life when I was able to make that jump and, happy that I did, and happy to be where I'm at today.

Sean Stein Smith: Awesome stuff there, Joey. And also, to just echo on that point — it honestly does highlight that even an individual whose background isn't audit, tax or any one area can pivot, transition and grow into a co-founder, higher-level type of individual in any industry. New or a current one out there. So I just wanted to point that out also.

Background on NFTs

Sean Stein Smith: But the area that I really want to pick your brain on here today, Joey, is this whole idea of NFTs. And I do know that you and I are on task forces, working groups all over the place, and so in a conversation over the last couple of weeks, we'd talked about some of the real underlying issues, trying to get NFTS to work, from a bookkeeping, valuation, audit point of view. But probably off the top first, what is an NFT for our audience out there?

Joseph Ryan: Starting at the very high level — NFT, what does it stand for? Non-fungible token. So what does that mean? Just for anybody that's familiar with crypto, basically Bitcoin, Ethereum, any token out there, one-for-one. If I own one Bitcoin, Sean owns one Bitcoin, it's the same tangibly. We can trade the Bitcoin with each other. We're holding the same thing. It has no physical or intangible difference as to the Bitcoin that Sean holds and the Bitcoin that I hold. Now, non-fungible token, that's exactly what it means. It means each individual token that is held is different. It's coded differently. It is unique in what it is and how it's coded into the blockchain. So if I hold one NFT, Sean holds another, even if they're the same picture or whatever it may be, they are going to be uniquely different encoded into the blockchain. They will each have their own differences.

So why is that important? What this really unlocks and where I think NFTs are going to be going is, we're starting with this art, JPEG, CryptoPunk or Ape Yacht Club phase of things and you're seeing kind of the art and the creative space initially be the ones that kind of take ahold of this NFT space. But I think where this ultimately is going to lead is you're going to see this open up the fractional ownership. So you can have large pieces of real estate, different businesses, obviously, et cetera, et cetera, et cetera, all sorts of different use cases for fractional ownership when everybody's holding a unique NFT, that's a specific token or representation of ownership of a specific either tangible or intangible asset.

So it opens up a lot of unique opportunities where you have fractional ownership or you have a uniquely identified characteristics of a person. So you could have NFT social security cards, NFT birth certificates, NFT real estate property titles, et cetera. And any blockchain digitized certificate of proof of existence is an NFT in itself. So I think where this is going is you're seeing the art and the fun stuff as to how this is starting to be explored and played with and the boundaries are being pushed in many different directions, but I think, ultimately, it leads to this more digitized world that we're heading towards with, if you want to say, even like internet metaverse, that kind of thing.

So that's, again, my opinion, but that's where you can see where this is going. So everybody's saying, "Oh, well it's just art, or it's just JPEGs, why don't I just screenshot it and then I don't have to pay $10,000 to buy this thing?" I mean, yeah, it is right now a collectible phase, and collectibles do have their place in this. Collectibles are always going to be around. People will pay thousands or millions of dollars for baseball cards. And those are literally just pieces of paper. Or any other collectible, you're going to have this phase where people value them. Value is in the eye of the beholder. What somebody values is different than somebody else's value. So that's where that niche of collectible comes into play. But I think these initial NFT experiments are stretching those boundaries, stretching the experiment of how this is going to go. And I think as it evolves over the next months and years, that's where you're going to see this going, entering into the whole kind of business, governmental, social phase going forward.

Valuation of NFTs

Sean Stein Smith: So it strikes me that, and I know that there has been quite a bit of conversation, that NFTs are a joke. That's echoing your point. It's a picture of a picture or a picture of a tweet, and then how is that worth $25,000? How is that picture of some artist or some athlete worth anything? I can go online and I can watch it. But everything has to have its opening bid, its opening innings, its first quarter of applications. And I would say that if I have NFTs linked to tangible property, real estate, other physical assets, even patents, copyrights, other intangible assets that actually have normal external evaluations, how does that complicate it? As far as individuals, institutions all trying to do valuations, audit these things, try to figure out tax impacts of them, how does that change the conversation around crypto? Because, right now, crypto is basically everything is taxed and the audits are still a work in progress. But how does this translation of NFTs into more tangible assets really amplify all of those issues?

Joseph Ryan: So what it really does is it forces accountants and anybody that's tracking and monitoring the transactions that occur to really get nitty gritty with the actual data for the transactions that are occurring. So right now, some of the challenges with tracking NFTs for, if you want to say, accounting and tax purposes is, how does the NFT actually evolve and where do the pieces of the NFT, for instance, for like a marketplace. So when an NFT is sold, the process of listing an NFT on the marketplace, paying the actual seller the proper revenue, the revenue stream going from the buyer to the seller, the marketplace getting their cut, maybe there's an agency involved, they're getting a cut, having that kind of all integrated into a smart contract that releases the crypto payment as it's paid, tracking all of the activity. Ins and outs for the flows of when an NFT is minted and when it's transacted with or utilized within a smart contract, and then when it's ultimately stored in the new custody wallet of the buyer and then going through that whole process. Again, when it's exchanged, being able to track each individual transaction and understand the ins and outs, the inflows and outflows of the proper data is really hard from an accounting perspective to track and identify the exact proper inflows and outflows, identify exactly when, if you want to say revenue recognition occurs, when a taxable event occurs.

At what point in time does it change hands? How much crypto is involved in that transaction and how much of the portion is going into your wallet? All of that from the interaction with the smart contract is not the easiest data to pull, especially when you have a marketplace that, if you're doing the bookkeeping for a marketplace, you have hundreds of NFT transactions a day, trying to scrape that data is where one of the biggest challenges occurs right now. And that's where, at Gilded, we just released a new, what we're calling NFT Ops platform, where you're able to really visibly see that data from a accounting standpoint, accounting level, to be able to easily identify specific inflows, outflows and to be able to manipulate and manage that data and be able to perform analysis on that data. To understand not just from an accounting perspective what our expenses were, what our revenues were, what our costs were, the inflows and outflows there, but also understanding the activity that's occurring on the platform. So there's a lot of data out there that's up for grabs. Creating the right systems around that data to be able to properly analyze from an accounting perspective and properly utilize that data to the maximum benefit, that's where a product like NFT Ops and some other products that are being launched out there to help with the NFT accounting. That's where you're going to see some maximum leverage occurring in the CPA accounting space.

Sean Stein Smith: So it strikes me that even though the mainstream conversation around NFTs is around NBA Top Shots and items like that, that on the backend, to actually get NFTs to work as an actual financial instrument, as a real asset class by itself, there's actually quite a bit of work to be done.

Joseph Ryan: Yeah.

Sean Stein Smith: And all of that work and building out the workflow, trying to track all of that data, to your point, also to echo overarching trends that are already underway in every aspect of advisory services, audit, tax anyway. Because as we all know, you, me and everyone tuning in here knows that our jobs, our roles, our firms are more and more based around how to manage, track, validate — and to do so in a consistent way — all of that information that's linked to transactions, be they crypto, be they NFTs, honing in on that, or other types of transactions out there. So, at the end of it all, it isn't terribly different from trying to track the massive increase in information that all of us are trying to handle anyway, all that we're doing is then adding in some extra hot sauce here in the form of NFTs.

Joseph Ryan: Yeah, exactly. And completeness and accuracy of the data, all my fellow auditors out there, the completeness and accuracy comment for when you're utilizing a dataset to perform auditing functions, same thing here. How do we make sure the data that we're extracting is complete and accurate? And that's just one aspect from the actual bookkeeping, or if you want to say the reporting side of things. The whole other can of worms is evaluation around and NFTs. And I see Dr. Sean kind of giving a smirk because this is a very hot topic where a lot of people don't even know where to get started, and we're very much just scratching the surface on how to value NFTs. I think we have a long road to hoe to get everybody on the same page and get regulatory bodies on a correct page, or at least put out something that says, “Okay, here's an initial procedures or guidelines around the evaluation process or evaluation aspect for NFT.” So it'll be interesting to see where that falls and how that comes about in the next months and years going forward. But yeah, that's definitely a hot topic. And I know you have a few thoughts on that as well, Sean.

Sean Stein Smith: Everyone knows that I always have thoughts, Joey. But to just echo on your point there, I would say that, honestly, having the policymakers and us be on the same page is optimistic. I'd be happy having us having in the same book to start! But there is obviously quite a bit left to do. Because, to your point, these non-fungible tokens means that a lot of the work and the processes and the overall frameworks that all of us use to value other assets don't really work. Because one share of Apple stock equals one share of Apple stock, and even private companies, there are all ways to do that, level one, two and three, and there are different tools out there to try to help us value assets. Whereas NFTs, by their nature, are all non-fungible. They're all individual items that have to be valued as of right now, at least. Hopefully this will change going forward, but all have to be valued as an ad hoc item. So it's a one-off basically.

Joseph Ryan: Yeah, exactly. And the challenges around the valuation today is massive, and, like we said, we have a long way to go. Right now, it's best case or best use case or accountants that come to me or angels that come to me are asking about valuation and I say, “Hey, right now, your opinion is as good as anybody else's. If you stand on the reasoning as to why and it's pretty logical and there's some underlying data to support that, right now, that's as good as anybody can put out there.” So it'll be interesting to see where that goes in the space. And like you said, getting the regulators or standard-setting bodies to agree on anything is never easy to begin with, and definitely very optimistic, as you say, just getting even in the same book would be nice. So it'll be very interesting to see how that unfolds in this space. And as we talked about before, this is the first inning, we're early in the ballgame. We've been early in the crypto ballgame, now we're early in the NFT ballgame, first innings here, really discovering where this is going to head and how it's going to impact society as a whole going forward.

Sean Stein Smith: Yeah. So actually, an off-the-record question here, Joey, just you and me here, how can we create an NFT of the NJCPA TechTalk Podcast? Could you help us with that?

Joseph Ryan: Oh, absolutely. Yeah, let's do it! And we can start selling these and we'll create a nice little community here. It'll be good.

Where to Learn More

Sean Stein Smith: There we go. Love it. So how can folks out there who are curious learn more? Because there's obviously quite a few open items out there in terms of the bookkeeping, compliance, external reporting, valuation, taxes, audit, IT side of things. Bitcoin is a great headline maker, but it's kind of old hat right now. It's old news. Because we all get that. Hopefully, we've all heard of it, at the very least. But if there are individuals out there, firms, partners out there who are curious as to how to learn more about NFTs, are there any go-to places for those types of start to have that process get underway?

Joseph Ryan: Yeah, absolutely. Teeing it up for the Gilded blog is a great initial resource for CPAs and accountants looking for more help or guidance on NFTs and the accounting for NFTs. Gilded has recently put out a few blog posts on NFT marketplaces, accounting, et cetera. That's an initial great place to go to start educating yourselves. The AICPA has put out some pretty good material recently on blockchain. They're starting to dabble a little bit into the NFT space. Typically, I would expect something big from them to come out soon on NFT accounting and some opinions there. The Wall Street Blockchain Alliance, we'll tee that up. Sean and I are both active members in the Wall Street Blockchain Alliance. We've put out some guidance or white papers or working papers around DeFi, NFTs that recently came out. That's a great place to go and do some more research on or pick up some research. As well as Dr. Sean himself, being a friend here, promoting a friend, Sean is a contributor to Forbes and has put out some articles around NFTs as well. So I'd say those areas are great to start for any accountant looking for more information on NFTs and where this is going.

Sean Stein Smith: Awesome stuff, Joey. And all right, so I have you here, you're on camera, you're on the record. So I have to ask your 2021 year-end price prediction for, of course, Bitcoin.

Joseph Ryan: Everybody wants to know, right?

Sean Stein Smith: Everybody wants to know, including me.

Joseph Ryan: What are we at today? I haven't looked recently. Are we still at 57?

Sean Stein Smith: 50-ish.

Joseph Ryan: Yeah, 55.

Sean Stein Smith: Yeah. I think we're a bit off the highs, but yeah, 50 plus right now.

Joseph Ryan: Typically, in the past, September has been a pretty down month, and then Q4 starts a little bit of a run-up. So I wouldn't be surprised to see another little run-up here, especially with NFTs being the hot topic de jure and everybody getting into the NFT space. You could see Bitcoin and Ethereum pumping another 20 percent. So Bitcoin, maybe to 75. Everybody at the beginning of the year talked about Bitcoin doing 100,000 by the end of the year, that obviously could happen if we have a significant run-up. But I wouldn't be surprised if it hits 75 again before the end of the year, and then we'll kind of see how it rides into 2022.

Sean Stein Smith: All right. Heard it here first. Joey, it was awesome having you on here. And I am going to have to have you on during the first quarter to come back and hopefully confirm your year-end price target, and to also catch up on everything going on, DeFi, NFTs and all the rest going forward.

Joseph Ryan: Absolutely. Yeah, I love it. Always great to be on with you, Sean, and looking forward to coming on again. I'll come on in Q1. Hopefully, I'm right, and then we'll have some more followers, I guess, trying to figure out what the next price prediction is!

Sean Stein Smith: All right, Joey. Awesome having you on. Thank you so much again.

Joseph Ryan: Thanks, Sean.