Ok, we’ve made that sound dramatic, but hey! in the fast paced world of Web3 and DeFi, some drama is merited? In the rapidly evolving landscape of Web3 and DeFi, navigating crypto bookkeeping for your company can be challenging. Most companies, especially small businesses also have a more standard side to their business – such as payments and receipts in fiat, salaries and contractor payments. Most small businesses in the sector tend to be hybrids; with exposure to digital assets and the complexities that come from this as well as have a regular set of assets that requires accounting that follows the rules that are already in place.
When it comes to the do’s and don’ts that companies in the sector need, information and professionals that know the ins and outs of crypto bookkeeping are largely missing. Here’s how EVALUA8 approaches crypto bookkeeping.
1. Don’t overhaul your legacy system at the start of your crypto bookkeeping journey
While not the most popular opinion out there, we are firm believers that you just don’t overhaul your current system because you have crypto assets in your business. For most of the clients we work with, fiat and related compliance still form a large part of their business, whereas crypto makes up a smaller proportion.
There are newer software in the market that caters to crypto currencies, their ongoing valuations and presentation but we can never be sure whether it can handle traditional accounting aspects just as well.
Then there is VAT which is completely digital now and the requirement to show a clear audit trail for all types of transactions shouldn’t be ignored. We’ve successfully continued to use Xero for our clients that have exposure in the sector. What we have added on are processes and documentation that captures crypto holdings each month-end as well as maintaining trails for crypto transactions (buy-sell-trade etc)
2. Gather supporting documentation and maintain audit trails
This is absolutely non-negotiable for crypto bookkeeping. You need to maintain back up workings and documentation for values shown in the books for crypto assets.
As an internal practice, we maintain screenshots and reports generated from each wallet provider on either a weekly or at the very least at the end of each month. A “point and time” value is otherwise quite difficult to justify when it comes to closing your books or for due diligence purposes.. We also use software as it captures transactions regularly. A an example, Koinly, well known crypto tax tool is great for calculating average cost values required to reach positions of capital gains or losses at the end of a financial year. It’s nearly impossible to keep a manual track of average values, also called share pool it requires meticulous recording of the smallest change in crypto balances held.
3. Be aware of VAT while doing crypto bookkeeping
The VAT aspect is without doubt very important for crypto bookkeeping. Most companies we work with are hybrid as we mentioned before. They have traditional revenue models (such as SAAS) with a variety of payment methods built it. VAT for these transactions need special attention as that follows the already established VAT directives.
A company’s VAT exposure and liability on revenue does not change just because they accept some form of crypto currency for invoice payments. In Xero, when transactions are captured, it has a VAT rate added to it normally. When it comes to crypto transactions, depending on how your Chart of Accounts are set up, certain transactions that should have VAT on it may fall through the cracks. HMRC conducts periodic VAT reviews so it’s quite important to get this aspect right.
A good practice to follow is to ensure a quarterly VAT report is generated and reviewed thoroughly before submitting to HMRC.
4.Phenomena that are native to crypto bookkeeping – check for changes from forks, airdrops and staking
Forks and airdrops are very native to crypto currencies. A fork occurs when a blockchain splits into two separate chains, usually due to a change in the protocol or community disagreements. This results in the creation of a new cryptocurrency, often with similar transaction history up to the point of the fork. This phenomenon is known as a hard fork. If you have new tokens added from such an activity to overall balances held, it’s value may need to be recognised separately in the books. In some cases, a fork does not create new tokens but this needs to be checked before a conclusion is made.
Similarly airdrops can mean you have more tokens in your wallet which need to be recognised in your accounting records. Having an understanding of what a fork or airdrop is a great starting point in deciding how to treat them in the books.
Staking is another type of transaction that’s native to the crypto world. Many companies put excess crypto funds into staking to earn some additional resources of them. Coinbase explains, the reason your crypto earns rewards while staked is because the blockchain puts it to work. Cryptocurrencies that allow staking use a “consensus mechanism” called Proof of Stake, which is the way they ensure that all transactions are verified and secured without a bank or payment processor in the middle. Your crypto, if you choose to stake it, becomes part of that process.
If a company is receiving staking rewards, a value attributed to the rewards need to be recognised in the books.
5. Record crypto fees and charges
While very similar to bank charges, these can get lost in translation as it can be minimal per transaction on some blockchains . As an example, Algo blockchains and some native blockchains can have very small charges per transaction. It might even be hard to calculate them per transaction. In such a case it’s better to capture them monthly for the sake of materiality and savings in time and effort. A checking system should be in place to check if relevant crypto charges have been recorded. This may mean downloading monthly transaction lists from etherscan, public blockchains or portfolio listing from exchanges.
6. Ensure there are periodic internal reviews
This is a key point for us here in EVALUA8. Regular monthly or quarterly internal reviews, particularly for smaller companies, are a simple yet effective way to catch and address issues promptly. This routine check helps identify missed transactions, incomplete records, or any inaccuracies in your crypto bookkeeping.
We recommend that business owners or their finance teams generate variance reports for the Profit and Loss statement and Balance sheet each month. This allows for immediate identification of differences month of month; for example, if you have missed revaluing crypto assets held in a specific wallet, a variance report reveals this instantly. When periodic reviews are not conducted, mistakes remain and backtracking to identify and rectify them takes time and effort better spend elsewhere.
We also recommend a thorough check at different compliance points. Quarterly checks before a VAT return is submitted, annual checks before numbers are shared with your accountant and the like. If there are no compliance event that occur regularly due to the size of your organisation a quarterly check is a good place to start.
We hope this checklist has helped to form a basic structure around your crypto bookkeeping. If you are having trouble setting up a proper finance function for your crypto company, we can help you at EVALUA8. With over 5 years experience, in building and maintaining finance departments of companies in the sector, we provide crypto bookkeeping services that are clear, timely and concise.
Notes and references
- HMRC’s crypto assets manual specifically talks about taxation on different scenarios
- All pictures used in the article are from pexels.com and are Creative Commons licensed.