It goes without saying, we look toward technology to solve many of our problems. In most cases it can, but when it comes to accounting– and crypto accounting in particular– technology without human oversight and intervention can be problematic. AI, automation, and ML have all helped the accounting industry significantly, however just like an airport uses technology, there is still a human air traffic controller that watches and intervenes to prevent crashes and chaos in the sky.
The same goes for crypto accounting. You can let the software do the heavy lifting and reduce your data entry, coding, and doing many of the calculations, but it still requires human intervention to manage exceptions, complex transactions, special situations, and troubleshooting.
So why implement a software solution at all? Why not just use the exchange’s reports for your tax reporting and planning? You could just download the transactions from the exchanges and hand the files over to your accountant. Unfortunately, many of those reports do not include the necessary information (or an accurate analysis) to help you understand and optimize your tax position. Additionally, given the time crunch at tax preparation time and the uneven crypto expertise among accountants, your return may not receive the level of scrutiny at the transaction level to ensure the best tax position is achieved. Instead, we recommend companies utilize one of the many crypto ledger programs that can help track your crypto and are designed to calculate your tax liability.
Crypto accounting software needs the “human touch”
While technology has enabled cryptocurrency accounting, it, too, requires knowledgeable oversight to ensure that the inherent complexities in the accounting are properly interpreted. Here are some of the areas where the human touch helps in managing your crypto accounting:
Avoiding download/upload errors
Given the speed in which this area is evolving, and the rapid deployment of new exchanges and wallets, crypto accounting software programs haven’t been able to keep up with developing new APIs for all of them. In those cases, it requires downloading the transactions from the exchange or wallet, formatting it to match the specs required by the crypto ledger and then uploading them. This download/ upload cycle is inherently tricky because it puts a manual process in the middle of your technology. And, as we all know, once that human element is added to the mix you run the risk of errors, exceptions, dropped transactions and even duplication. A simple accidental keystroke could add 0’s to a number, delete a line or add a plus or minus sign to a transaction. That’s why it is important that the uploads are reconciled regularly back to the source exchange or wallet to ensure that all transactions have been recorded and the results match. It not only gives you peace of mind but provides a nice clean audit trail (which we accountants love!)
Most transactions have multiple components to them. Whether it is as simple as recording a sale and a transaction fee or transferring assets to multiple wallets or exchanges, it is important that your accounting reflects all the pieces of a given transaction. This is especially true with transfers between exchanges and wallets. For example, if you decide to transfer $100 from your traditional bank account to your savings account, and only $90 shows up in the savings account, you’d want to know where the $10 went. The same can happen with cross-exchange/wallet reconciliations. We’ve seen a client move funds from an exchange to multiple wallets, and inadvertently put a portion of that transfer into their personal account because they selected the wrong wallet. Because we were reconciling the accounts and noticed that not all of the BTC transferred from the exchange made it to the business accounts, we were able to flag it and ultimately the client corrected the error. Unlike fiat, when you transfer crypto from a business account to a personal account, it creates a taxable transaction due to the change in ownership. In this case it was an error, and if left unchecked for future transfers, could have been an expensive surprise. In other cases, the cross-exchange reconciliation is a measure of control that someone is not diverting funds to their personal accounts.
Avoiding classification errors…and unintended tax liabilities
We all know that certain crypto transactions create a taxable event and others do not. Converting crypto to fiat, exchanging one coin for a different coin, receiving crypto as revenue or using crypto to pay your expenses, are transactions that have tax implications. So it’s extremely important that when the information comes in through the downloads it is recorded properly. If you aren’t careful and review the way transactions are being recorded, you may be adding taxable events to your ledger. For example, a transfer between exchanges (a non-taxable event) may be misclassified as a sale (a taxable event) in one exchange and the receipt in another exchange could be recorded as a purchase (non-taxable) or revenue (taxable). If someone unfamiliar with these nuances isn’t watching the coding of transactions and following the trail, it’s very likely errors– and an unintended tax liability– can occur. In some crypto ledger systems, the matching is done for you, but only once you code the initiating transaction properly. The accounting system will then go and look for the receiving end of the transaction.
These are a few reasons why it’s important that your crypto accounting system is enhanced by human oversight. We like to call it “technology-enabled, human powered accounting”. There are many more crypto accounting challenges we’ll cover in upcoming blog posts. While technology has enabled us to automate much of the recordkeeping, it’s important not to be wooed that it is the end-all-be-all to your crypto accounting. Not only will a human touch and oversight ensure accuracy, but it can also mitigate errors that have unintended tax consequences.
If you need help selecting the right crypto ledger or need some help with your crypto accounting so that you can ensure accuracy and optimize tax planning, don’t hesitate to reach out to us.