When it comes to crypto bookkeeping, there aren’t a lot of helpful tips and tricks available on the web. If you Google “how to do crypto accounting” or “best practices for crypto bookkeeping” you won’t find much. Unlike any traditional accounting topic where there are plenty of resources, whitepapers, textbooks, and experts, finding answers to your crypto accounting questions often means you need to reach out to an expert in the field. Adding to the complexity is that this field is new and evolving and guidance is limited so understanding crypto bookkeeping best practices is important.
Why Proper Cryptocurrency Bookkeeping is Essential for Your Business
Getting your crypto bookkeeping right is essential on a number of fronts. First, good crypto accounting practices will help you track your business’ performance. Getting a good handle on your crypto revenue, expenses and equity is important to track your success and identify areas for improvement. Secondly, proper crypto bookkeeping will ensure that transactions are classified properly so you don’t overpay on your taxes. A simple misclassification like tagging a transfer between wallets as a sale of assets can cause an unintended taxable event. Lastly, proper crypto bookkeeping will help your business pass an audit, whether it is the IRS auditing you or annual audits as required by your investors.
5 Bookkeeping for Cryptocurrency Best Practices
While there are many ways we’ve found to streamline your crypto bookkeeping and activities, here are a few of our top tips that can get you started:
1. Use Crypto Accounting Software
Can’t QuickBooks, Xero, or NetSuite handle crypto accounting? The short answer is no. QuickBooks, Xero, and NetSuite do not have the necessary infrastructure to accurately pull data from the blockchain and capture the complexity of crypto transactions. If you think about the sheer number of blockchains that exist and the complexities of the cryptocurrency transactions conducted on those blockchains, it is almost impossible for these legacy systems to evolve as quickly as crypto is evolving. These legacy systems are excellent at handling fiat transactions that run through financial institutions: bank feeds, credit cards, transfers, and multi-currency transactions but it is a completely different ballgame retrieving data from blockchains to record transactions.
That is why you need to use a crypto accounting software. These can pull data from the blockchain with the necessary data and do the transaction costing for you. While these softwares are a good start, they are also evolving as the market evolves. It’s important to understand that in these softwares APIs and Integrations are continuously being added, but aren’t always complete. With these softwares you will, on occasion, need to manually pull data from your wallets, configure a file and upload it into the system. These systems have many of the functionalities of traditional systems like NetSuite and QuickBooks, however, they aren’t as tried and true as those systems. It’s important that if you use a crypto ledger, they aren’t always “plug and play” and the reporting needs to be verified and cross-checked to ensure something hasn’t changed.
2. Have Good Crypto Wallet Hygiene
A simple thing like having your wallets structured properly can make your (and your accountant’s) life so much easier. Good wallet structure is often referred to as having good wallet “hygiene.” So how can you structure your wallets to make your accounting go more smoothly? Simple. Use wallets for distinct purposes. For example, we recommend to our clients use one wallet for each different type of revenue stream (e.g. NFT sales vs royalties), and a different wallet for paying contractors. Once you know that all the transaction types in each wallet are the same, it makes it easy to code the transactions and reconcile them. Having a purpose for each wallet can also be used to segregate other activities, like having a separate wallet for each trading strategy.
It is also important not to mix business and personal transactions in wallets. Not only does it make the accounting messy but can cause issues when it comes to separating personal and business liabilities. By having single-use wallets, you will have a clean audit trail and can improve the efficiency of your accounting team significantly.
3. Know Where Your Crypto Wallets Are
A common challenge among companies we work with is the infamous “forgotten wallet”. In our experience, no matter how much due diligence we do when we take a client on, almost every single client has forgotten about wallets they owned with significant transactions in them. You can avoid this by first thinking through the accounting workflow and associated revenues and expenses and thinking about where you conducted those transactions. Secondly, keep a record of your wallets as you open and close them. Even if a wallet has a $0 balance but has transactions in the tax year, you still need to record those transactions. Before you close any account, download all of your transactions, label the file and keep it somewhere safe for your accountant to be able to file your taxes. A good accounting team can sometimes identify these missing wallets if they can recognize patterns of either inflows or outflows to the same wallet addresses. Without a sophisticated team, however, you may miss out on either revenue or expense transactions which can cause tax or audit issues down the line.
4. Don’t Wait Until the End of the Year to Do Your Crypto Bookkeeping
While often crypto bookkeeping gets swept under the rug as one of those tasks you’ll get to, it is very important that you don’t plan on a big crypto bookkeeping catch-up session at the end of the year. It’s much harder to get accurate accounting when you wait until the end of the year, or quarter. Unlike traditional bank accounts where transactions come with vendor names or other clues to help you recreate your financials, crypto transactions are often just a series of transactions going in and out of wallets made up of 25+ numbers and letters. It’s much easier to remember what a transaction was for when it is relatively fresh in your mind. When the accounting isn’t kept current, doing crypto bookkeeping can become an exercise in forensics – tracking down the details of transactions that happened months ago with little or data points outside what can be gleaned from the block explorer. It’s a frustrating exercise for both the business owner and the accounting team, so updating the books as frequently as possible can alleviate issues early on.
5. Don’t Do Crypto Bookkeeping Yourself (DIY)
One distinction between regular fiat bookkeeping and crypto bookkeeping is the amount of data you need for every transaction in crypto – the most important piece is the cost basis. Because crypto is treated like an intangible asset, you need to ensure you know at least six data points:
- The acquisition price
- Date and time of acquisition
- The disposition price
- The type of transaction
- Whether or not that specific asset was impaired and at what price
All of those components are needed to accurately record the transaction. If you get any one of those wrong, you could have unintended and unnecessary taxable income or financials that are misstated. For most businesses, trying to account for crypto using spreadsheets quickly becomes unwieldy, especially if you have thousands or tens of thousands of transactions. Even if you do choose to use a crypto ledger system, as we said before, they are still evolving. That means things get fixed and others break. Sometimes all the transactions in a wallet get pulled into the system and sometimes do not. Sometimes a name change in token wipes out transactions, sometimes not. That is why you need to have reconciliations between your source documents, and the crypto ledger system 100% to keep accurate accounting– all of which should be left to a professional.
Does Your Crypto Business Need Assistance With Bookkeeping?
Doing crypto bookkeeping can be overwhelming for those not familiar with the complexities of accounting for virtual currencies. Keeping track of your crypto goes beyond just coin tracking software and needs a robust system for proper accounting. If you don’t know where to start or are looking for some expertise, please contact us.