Crypto accounting

The Importance of Crypto Bookkeeping for web3 Firms

Explore the challenges of crypto bookkeeping and the benefits of automated solutions in the rapidly evolving cryptocurrency industry.

November 1, 2022

Despite millions of dollars worth of cryptocurrencies being transacted all across the globe every single day, the crypto industry lacks proper accounting tools required for recording such transactions. Most of the crypto bookkeeping is still done manually, or using spreadsheets, which is highly inefficient and time-consuming, which begs the need for more sophisticated automated solutions, for better record-keeping practices.

The global cryptocurrency market cap, at the time of writing stands at just over $1T, making it the 14th largest asset class by market cap. Since the first bitcoin transaction in 2009, the cryptocurrency market has exploded leaps and bounds, not only in terms of price, but also in terms of adoption & acceptance.

Naturally, such explosive growth & adoption has caught the eyes of regulatory authorities all over the globe, who are constantly coming up with new guidelines to ensure smooth and compliant facilitation of crypto-related businesses & activities.

At present, many businesses face major roadblocks in crypto book-keeping & accounting practices, deterring them from venturing into this innovative space. Due to the encrypted and anonymous nature of most cryptocurrencies, crypto accounting is by its very nature, very complex and confounding. However, bookkeeping is crucial for web3 organizations since it provides the foundation for accurate reports and audits. As a result, automated crypto bookkeeping solutions are gaining more and more traction across web3 businesses, in order to help them maintain accurate books in a cost-efficient manner.

What is crypto bookkeeping?

Cryptocurrency bookkeeping is the process of recording all crypto transactions into organized accounts on a regular basis. It ensures that records of any blockchain activity are accurate, up-to-date and comprehensive. Each type of crypto transaction, whether related to trading, staking or providing liquidity must be properly recorded.

At present, there is no benchmark process for crypto bookkeeping. The International Financial Reporting Standards (IFRS) does not provide a single bookkeeping framework. Thus, businesses are forced to approach crypto bookkeeping on a case-by-case basis.

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Problems faced in crypto bookkeeping

Most web3 companies presently use manual processes to keep track of transactions, wallet balances, and other on-chain operations. The reason that they use this prehistoric method is because cryptocurrencies do not have a central authority that tracks and manages funds.

Different web3 businesses such as exchanges, funds, blockchain enterprises, and brokers often manage their tokens on a plethora of different wallets or exchange accounts. These different platforms deliver transaction history in different formats. Therefore, at the time of tax reporting, businesses have to collect accounting data from multiple sources in multiple different formats, making the entire process very inefficient & time-consuming.

The tiresome & complex nature of crypto accounting forces many businesses to lower the priority of bookkeeping tasks in day-to-day trade, which can create significant problems later, inevitably leading to significant accounting costs.

Common issues with crypto bookkeeping

Incorrect Cost-Basis Calculations

Cost basis is the price of the underlying asset when a transaction is performed. If a trader purchases a cryptocurrency at a particular price but sells it in parts, at multiple different prices, then the profit or loss on each transaction should be traced and compared with the original investment cost, on a pro-rata basis. Matching cost-basis retrospectively to transactions is a time-consuming and highly risky process. Subsequent calculations such as realized gains or losses always depend on accurate cost-basis data. Many jurisdictions count each crypto transaction as a taxable event, therefore maintaining an accurate cost-basis becomes of utmost importance for maintaining correct records.

Incorrect Spreadsheet Formula

Spreadsheet software provide an easy-to-use data entry platform for manual processes. These manual processes always run the risk that calculations are susceptible to human error, such as keying in the wrong cells or copying over the wrong number from sources like Etherscan. There are equal opportunities to overtype incorrect numbers or formulas, or incorrectly factor in numbers.

Inaccurate prices matched to transactions

Blockchain transactions usually do not have the price of the relevant token price at the point in time when the transaction happened attached. The price points are relevant to conduct analysis, generate reports and therefore leads to the necessity to manually match the corresponding prices to transactions. Complexity is further increased due to the fact that there is no universal price source. Inaccurate decisions on this front lead to a chain of bookkeeping errors, leading to significant problems in tax reporting, etc.

Missing transactions/data due to importing issues

Currently new blockchains, assets, protocols and other on-chain applications lead to complex data structures. When companies rely only on one source for fetching blockchain data, they face the risk of importing issues with specific transactions on other data points. For example, if a staking protocol is not supported by a block explorer that is used for data fetching, this data might not be imported and be fully missing the consolidated reports. Therefore, it becomes important to only trust reliable software solutions that fetch and consolidate on-chain data.

Incorrect account & transaction labelling

Blockchains provide different sorts of hash and encryption information, but transactions are generally not legible since no qualitative data to understand the purpose of the transaction is stored. If the purpose of a transaction is not noted down at the same time when the transaction is happening, retrospective categorizing becomes a very hectic task. Very often web3 firms are not able to reproduce the purpose of historic transactions and are therefore exposed to the risk of mislabeling on-chain activity.

Benefits of automated crypto bookkeeping

Accounting automation in trad-fi has provided businesses with countless benefits over the years, such as easier extraction of data, faster & more secure data transfer, cloud storage solutions, user-friendly dashboards, quicker data retrieval, automated tax records, cash flow tracking, accurate revenue recognition and so much more.

Naturally, automated crypto bookkeeping also offer users various benefits as well. By automating the capture and classification of crypto transactions from crypto exchanges, wallets, custodial services and decentralized financial blockchains, crypto accounting software reduce the complexity of crypto financial accounting.

In-built features for tax collection and portfolio analytics lessen tax obligations and enhance portfolio performance. Automated software consolidate transaction data across multiple wallets owned by users, allowing them to visually track their inflows, outflows & transaction fees in real-time. Consolidated Profit & Loss statements, instantaneous transaction labeling and real-time reporting of liquidity positions help web3 companies streamline the complicated process of bookkeeping and make it cost-efficient, user-friendly & time-saving.

The need for crypto bookkeeping and accounting software is clear

With the evolution and growth of the cryptocurrency industry, we have seen web3 companies starting to operate under more and more complicated business models, which have made their bookkeeping procedures more complex than ever before. The reliance on crypto accounting software by crypto enterprises, accounting firms, traders, investors, miners and portfolio managers, in order to handle financial bookkeeping will only increase as the overall crypto market keeps evolving.

As crypto becomes more mainstream, countries across the globe will try to tighten regulations around blockchain, which will only boost the need for automated bookkeeping. Such solutions will also provide traditional businesses with the required confidence to jump into the web3 boat, without fearing accounting complexities & the regulations associated with it. A company’s success is driven by accurate bookkeeping. It is a foundational accounting process, and developing strategies to improve core areas of your business are nearly impossible without it.

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