Bitcoin’s blockchain is a public ledger. It’s the list of all the transactions ever made inside the network. That applies to most of the cryptocurrencies out there, regardless of their level of centralization and privacy, the blockchain underneath is an immutable ledger.
Most companies dealing with cryptocurrencies today have a hard time when it comes to accounting, but why is it so difficult? Let’s go through the most common issues.
While tracking Bitcoin inside its network using the data from the public ledger is simple and straightforward, tracking different cryptos across different locations can be quite challenging. Depending on the level of preference, necessity or convenience, you can hold your cryptocurrencies in different wallets, exchanges or custodial services.
This is especially true for altcoins which are not always all supported by the same wallet provider. Also, you may want to hold cryptocurrencies in different exchanges for fast order execution and different features. For example you can keep Bitcoin on Binance because of the BTC futures, but have some of the altcoins on FTX for the benefit of having to margin trade them through derivatives as well.
The next problem is that those exchanges often let you export your trading history for just up to 3 months. That would require you to compile all the transaction history into a single spreadsheet which could be challenging, particularly if you are an active investor.
2. Changing book value
Cryptocurrencies have ever changing book value expressed in traditional fiat currencies. If those assets would be used just as intended and would become a legal tender then a transaction would be viewed as simple in/out.
However, because cryptos are not a legal tender and serve (mostly) as investment vehicles, for accounting purposes we must associate their book value in time of transaction. This makes things a lot harder for accounting as a new variable is introduced. Another layer on top of this is whose data to take? Prices may vary on different exchanges for different cryptos.
3. Taxable events
Accounting is done for the tax purposes. You must keep your books as a legal entity and file your tax return at the end of each fiscal year to stay compliant. This is where things get tricky – not every crypto transaction is taxed the same.
First, an important thing to note that in most jurisdictions cryptocurrencies are not viewed as currencies, but something along the lines of digital property. In the case of property tax applied here is the capital gains tax and it is usually calculated based on the difference made between the purchase price and the selling price.
This is why different operations like payments to vendors, mining cryptocurrencies, trading, staking and so one have to be differently accounted for, having in mind the underlying expense.
4. Incompatible integrations
There are some solutions for crypto accounting that strive to solve these problems by bringing the gap of fluent data with fixed accounting requirements together. They allow users to integrate their crypto tracking platforms with the traditional accounting ones. As good as it sounds, this proves to be ineffective because traditional accounting platforms were not built with these demands in mind.
Data can get lost, tracking can be inaccurate, and/or require further manual efforts.
How to do cryptocurrency accounting?
These problems only increase in scale with a higher activity usually associated with professionals operating in the crypto industry. The Crypkit team have developed a fully fledged accounting solution to provide a tool that would assist you in these operations.
On top of the comprehensive tracking function, intuitive dashboard, real-time price data processing and DeFi support, Crypkit will help you to stay compliant – as you can do the full accounting process withing one platform.
Having all the features and tools of the powerful tracking platform streamlined into a unison accounting dashboard will save you time, energy and money while giving you a piece of mind. Crypkit has all the functions of the traditional crypto accounting platform, with added crypto-support on top. You can directly invite your accountant on to the platform and have them do all the work natively without having to do complicated calculations and compile data from multiple sources.
Also you can invite auditors to collaborate. This can further increase transparency which is very much needed for this emerging sector in case regulations and requirements change. As the market is still in its early stage and with new demands from tax authorities may arise it is always best practice to have all the needed information, then later if needed retroactively going through your transaction history.
Crypkit is an all-rounded accounting tool that enables you to maintain your focus on what you truly are set to achieve, and let your accountant do their job.