Do not get caught in a cryptostorm this tax season

We’ve been here before.

Since the rise of bitcoin over a decade ago, the cryptocurrency market has undergone four crashes in which the price of BTC has fallen by at least 80 percent, if not more. Yet, every time the industry is written off as a burning tulip field, it rises from the ashes with genuinely disruptive technologies and innovative uses.

Do not believe the savvy flip-flops of importance almost as often as price fluctuations. Ethereum burst onto the scene in 2014, after the crash in 2017. Decentralized Finance (DeFi) emerged after the crash in 2017-2018.

Sorry Cramer, no returns.

The Ethereum and Decentralized Finance (DeFi) ecosystems have real value— $ 62B Total Value Locked (TVL), for what it’s worth—– and it’s in a bear market! TVL for DeFi peaked at around $ 180 billion in November 2021.

That’s why JPM wants to bring $ 1,000 tokenized assets into the DeFi ecosystem. And despite market turbulence, venture capitalists are still buying for $ 15 billion in 2022.

Where do we go next? I can not say that. But the takeaway for accountants is ready. Crypto has grown up and will soon be on the organization’s balance sheet if it is not already.

The revolution is here, but it will not be broadcast on television. It will be registered on the blockchain. As exciting as it is, it is a common misconception that computer accountants need to make their job so easily accessible. Yes, general ledgers are immutable, but it’s not like a bank statement: extracting accounting data is not as simple as it seems.

Assume that your organization or customers have digital assets on their balance sheet. In that case, they are likely to engage in many activities such as moving digital assets between blockchains, staking and yield farming. To make matters worse, they perform these actions on the scale of 100s, if not 1000s of daily transactions.

Capturing all the information accurately is a big order, but it is not impossible if you follow a few guidelines. Here are five best ways to ensure your customers follow through to make your life easier next tax season.

Inoculate a culture that registers everything –– and is strict about it

We have discussed this before, but thorough record keeping is a must. While many people think of the blockchain as this all-seeing, self-documenting technology, it does not mean that it is easy to interpret for tax purposes.

Bank records, for example, are highly organized and detailed information provided by suppliers and payees. In some cases, they may have a brief description of the item sold.

While the blockchain is rich in data, it is essentially a permanent record of letters and numbers that can be examined through a block explorer such as EtherScan. However, this information is not accountable. Copying and pasting this into a spreadsheet is not going to help you.

2. Some important questions to ask are as follows:

• Who is the validator’s customer?
• What is the contract?
• Who is the principal and who is the agent?
• What is our performance obligation? Is it at block level?
• What is our price source?
• How many performance obligations are there?

Advise customers to use only one exchange.

Using multiple exchanges introduces many unnecessary complications for your accountant during the tax season.

The more sources you pick up on Tax Day, the greater the headache for your accountant. This is problematic for two reasons. The first is that each exchange sends out its data in a different format, which increases the likelihood of errors when your accountant combines CSVs. The other is that this is an incredibly time-consuming, manual task that increases your billable hours. In other words, it is a loss-loss for everyone involved.

4. It is a must to ensure that your customers maintain excellent wallet hygiene.

It’s easy to think that it’s best to keep all your digital assets in one place, but that’s not necessarily true.

Good wallet hygiene is crucial when organizations scale because it helps accountants understand transactions from a workflow perspective while processing them. Always have transaction-specific wallets (eg investments, DeFi transactions, revenue, etc.), and use a consistent naming system. For example, if you are a miner, you will need a separate wallet to hold mining rewards.

5. Talk to your customers early and often.

Between tracking activity between and across different exchanges, blockchains and wallets, and then accurately reporting these activities to your accountant, accounting becomes very quickly complicated. Talking to your accountant early and often can help reduce this and ensure that you are always in line.

Accountants, are you related? My advice is that communication is a two-way street, and you need to work with your customers to ensure that they follow best practices such as those described above. Another option is to use a software solution to automate and streamline many of these processes.

Test their impairment holdings regularly: assets-to-assets or, in more detail, batch for batch.

I know, keeping inherent volatile assets like crypto to the same standards as other intangible assets like goodwill seems like mounting a square stick in a round hole. Still, until we get better guidance, that’s what it is.

And let’s be honest. Assume that your company or customers have digital assets on the balance sheet and must comply with US GAAP (Generally Accepted Accounting Principles) or International Financial Reporting Standards (IFRS). If so, you need to test for impairment this year.

Between volatility, transaction volume and the large number of digital assets to be tracked, it is easier said than done to accurately calculate carrying amounts across an organization’s portfolio. At best, it is an incredibly time-consuming manual process, and that is why many organizations struggle with impairment testing for digital assets – or worse, do not do it at all.

Do not be them.

Although manual impairment testing is challenging, it is not impossible.

In general, there are four steps:

Impairment testing shall be performed at the individual party level; Therefore, it is very important to track each digital asset separately

2. Compare the purchase price – the cost basis – for the digital asset with the current market value of the digital asset

3. Assume that the price of the underlying asset falls below the purchase price at any time during the reporting period. In that case, the asset is written down. The company must write down the value of the digital asset to the lowest point in the reporting period, together with recognizing a corresponding loss.

4. As long as the company has the digital asset, the asset must undergo continuous impairment testing until it is sold, disposed of or traded.

Reduction can be a difficult task and a full-time job in itself. You can give it to an intern or use software that makes it easy as a click – your choice.