How should we make the crypto bookkeeping in a proper way?
Is there a proper way when it comes to crypto bookkeeping?
We could argue in the current context. The guidance is unclear. Indeed, the SEC has not specified much how to handle crypto-accounting, while in Europe rules vary country by country.
The solution is to make our best to comply, with good intentions. Here are a few matters to think about.
There are best practices to keep in mind. The same ones as with “normal” bookkeeping, and more. We need to keep proofs of invoices, proofs of payments, and save screenshots of transactions if possible. Additionally, keeping a list of exchange accounts, addresses, and wallets used will be helpful.
Many businesses, freelance workers, and crypto companies use a spreadsheet for their bookkeeping. It would be useful to decide early between using dedicated software and spreadsheets. Spreadsheets for bookkeeping are a flexible way to start with but it makes it quite hard to power financial statements. You need a very strong knowledge of accounting logic to limit mistakes and losses of time. Using a software is easier but it can be expensive. If you decide later to move from spreadsheet usage to software, you might struggle to import data into the new software. Good to keep that in mind.
What about getting help from an external accountant?
It is a cost for your company. But the price you pay allows you to share some responsibility and knowledge. You get some guarantees that your company will follow the rules. It can even be easy if the external accountant is crypto-friendly.
How to find a suitable accountant?
Ask crypto friends how easy it is to deal with their accountant, you will get an idea of how helpful the accountant is. Another option is to look for an accountant who has experience with the software you use, and who knows already about Etherscan, ERC20, and forks.
An external accountant can help to define In which category fall the cryptocurrencies for your business. Depending on the country, we consider them as intangible assets, commodities, investments, or currencies. Be careful about local rules as for some every cryptocurrency transaction creates a taxable event.
Last but not least, you need to define principles early.
For example, you need a method to select the exchange rate you are going to use. Are you going to use CoinMarketCap as a reference, Binance or Kraken? The choice you make will have to remain consistent over time. In the example of suppliers’ invoices, you need to define a rule about the exchange rate. You could define that you use the one at the time of payments.
Those rules are important to think about. Write them down and stick to them.
Which tools are the most useful?
There are many applications in the crypto space. Most of them are quite new. Their first usage was not always compliance-friendly.
We’ve classified tools into 3 categories. The first one is about storing and managing funds. The second one about tracking transactions. And the third one involves invoicing and tax calculation.
Note: all the tools below are free. Some need a login.
Store & manage funds
- Exchanges: Coinbase, Kraken, and Binance allow one to buy and store crypto assets. They also provide a history of transactions that you can download. They are useful when you need to convert FIAT currencies to cryptocurrencies or the reverse. They list several tokens such as BTC, ETH, DAI, and REQ.
- Web & Mobile Wallets like Metamask, mycrypto.com, and Portis.io. They help to manage your funds while making it easy to approve transactions and interact with applications.
- Physical wallets like Trezor or Ledger allow securing your funds for the long term.
Crypto banks such as Multis.co integrate decentralized tools to provide an experience close to banking. They integrate blockchain-powered features like instant and low-fee loans.
- Blockchain explorers: Etherscan.io & blockchain.com are the most well-known blockchain explorers. They allow checking transaction statuses in real-time. You access details like gas fees and gas limit. It is also handy to check the balance per currency and address. Taking Etherscan as an example, visit https://www.etherscan.io/, paste your public Ethereum address to access this detail page. It’s a common tool you could bookmark. On the main tab, Transactions, you only see Ether transactions., and the second one is a compilation of all your ERC20 transactions.
- Balance functions: the blockchain explorers provide balance functions. For example, Etherscan allows getting the ERC20 balance at a certain date thanks to this page: https://etherscan.io/tokencheck-tool. Same for the ETH balance here: https://etherscan.io/balancecheck-tool.
- CSV export: Etherscan, for example, gives you access to any address history that you can export from there. Then this can be used to make entries in the accounting software.
It’s at the bottom right of the main address page, Transaction tab, click on Download CSV Export.
- Etherscan API: The JSON obtained from these APIs has a bit more data than the CSV export.
Invoicing & tax calculation
Some startups help with invoicing and software import such as the Crypto to Quickbooks tool. They can easily integrate Request technology. The invoices are on the blockchain, and they are easy to import or export to any software.
How to prepare best for the audit process?
There are a few measures that you can take early to avoid spending 2 months a year hard working on the audit process.
Accounting principles are important. Consistency is necessary.
You will save time if you define them early. It will take a lof time to be sure they have been respected if you do it later. For exchange rates, revenue calculation, and other subjects, keep using the same logic the whole year.
For exchange rates, many crypto professionals are using more than one exchange to deal with crypto. You can use CoinMarketCap (CMC) rates in this case. CMC history is downloadable in a few seconds as a CSV. Build a spreadsheet with the rates of CMC, or let the auditor know where to find those exchange rates.
The audit process contains rules that must be respected.
One of them is to get proof of ownership of the addresses. Make a print screen of the wallet account where we can see the owner and the blockchain code of the account (wallet owner + blockchain code listed on the same screen). It’s only pseudonymous for Ethereum addresses. We must do our best.
The auditing company will also need a balance at the end of the fiscal year, a print screen or statement with the balance of the wallet can be necessary. They would need the balance, the date, and the Blockchain address listed on the same screen. In practice, you can use the Etherscan.io balance function for ERC20 and ETH (as mentioned above).
Let’s write a few words about invoices. Most crypto transactions don’t have an associated invoice so far. Yet, auditors need client and supplier invoices. The Request technology allows one to create and pay crypto invoices. It’s also currently accessible via tools such as invoicing.request.network. It’s important to have auditing processes to know where the money comes from and where it goes to.
Finally, prepare documents to justify most movements, including loans. If you borrowed money from persons, you need documents and identity, especially for loans in cryptocurrencies. Moreover, using MakerDao or Compound to borrow money also leads to a need for proof. The minimum will be to provide a link to your funds.
What positive changes can we expect for the future?
The technology under crypto assets has the potential to disrupt the current bookkeeping system.
The double-entry bookkeeping system has been invented around 1000 years ago. The system will change. Rules too. Technology is disrupting the current model. The innovation spirit around it also helps to change minds. We start asking ourselves for what reason the rules are here for. We will apply more common sense to redefine the system and the rules.
Some promising changes are already on their way. The immutable nature of blockchain technology makes it an accounting technology. Accountants today spend some time doing the reconciliation between invoices and payments. Getting to know which payment matches which invoice can be challenging. With blockchain technology, invoices and payments make one. Over the next few years, it will become harder to identify the difference between the accounting and the payment industries.
Bookkeeping software is not interoperable with each other. You can not easily import and export from a software to another. Even when we manage to do it, it involves duplicating data. A blockchain-based invoice list will improve data communication between systems, without duplication.
Payments are almost instant. It’s already possible to build an accounting dashboard in real-time. Auditing algorithms will be able to make their job in real-time too. As a result, tax calculation and tax payments could apply the same way.
The current system is quite old. The crypto space is innovative and immature. It provides many tools. Crypto companies have a hard time dealing with tax and bookkeeping requirements. And it’s the very technology that is behind the cryptocurrencies that will help improve the system.
Over the years we’ve been making small improvements on top of the system. There is an opportunity for a new model to emerge. We could start from scratch, not without learnings costs though.
We could transform some accounting into automated actions. It’s an opportunity for tech-friendly companies in the sector such as PwC and EY to build automation.