Cryptocurrencies, digital assets, and the tokenized economy are bringing a plethora of changes and potential for companies and institutions - but they present significant challenges in the process of crypto accounting. To some extent, by definition, digital assets aren't designed to fit inside the bounds of traditional accounting systems and balance sheets. With decimal places on some assets stretching into the double digits, non-standard events, unclear cost basis reporting, among plenty of other things, understanding the challenges of cryptocurrency accounting is paramount before you begin the process of working with crypto assets.
At Ledgible, we specialize in making crypto, legible, to traditional financial processes and systems. Let's take a look at key challenges in the digital currency accounting process and potential solutions for companies and institutions.
Challenge: Tracking necessary values (cost basis & fair value)
At first glance, cryptocurrencies might look like a straightforward asset to account for since they're treated in tax scenarios similarly to traditional stocks and property. However, due to cryptocurrencies' non-standard transaction style and non-standardized reporting methodologies, the water quickly becomes a muddled as you dive in.
Each purchase event for cryptocurrencies is often considered a "lot", which has an associated total cost and the amount of the underlying asset. Separate transactions of cryptocurrencies are generally tracked separately. A purchase of .46592 Ethereum on one day can't be lumped in with another purchase of Ethereum on another day. This should hopefully make sense and it aligns with the AICPA's recommendation to not aggregate similar assets together for digital currencies. For anyone interested in learning more about crypto accounting, the AICPA's "Accounting for and auditing of digital assets" practice aid is a great place to start.
Cryptocurrency markets make the accounting side unique compared to traditional stocks in that cryptocurrency markets run 24/7 and keep a sometimes mind-boggling number of significant digits in both the value and amount of the underlying asset. This means tracking cost-basis and fair value without a concrete reference of the transactions is difficult. Backing up for a moment, cost basis refers to the original value or purchase price of an asset, whereas fair value ties back to an estimate of a digital currency's market price.
You'll likely need to track cost basis, fair value, and book value for digital assets, similar to how one might account for other more traditional assets, but the challenges presented by cryptocurrency make this a trickier accounting nut to crack without the proper tools.
Solution: Ledgible Enterprise Accounting
With Ledgible's leading enterprise accounting software for cryptocurrency, you get on-demand, automated reporting. Ledgible Enterprise Accounting takes the headache out of managing books with crypto. Ledgible offers a wide range of reports to cover all cases from gain/loss reporting to asset balances. Some reporting options available to Ledgible enterprise crypto accounting users are:
- Capital Gains & Losses: Calculate aggregate portfolio gains and losses based on on-chain activity, normalized to any supported fiat currency
- Transaction Downloads: Export an exhaustive record of on-chain cryptocurrency transactions filtered by wallet, asset, and date
- OFX Reports: Generate an OFX file containing transaction data for import to GL systems including QuickBooks and Xero
- Exchange Orders: Pull detailed records of asset movement, valuation, and positions on any supported exchange
- Wallet Balances: Get day-by-day insight into historical changes to wallet balances and asset valuation
Challenge: Staking & Borrowing Crypto
Cryptocurrencies present novel scenarios for borrowing and lending assets all within the confines of a blockchain-based ecosystem. Companies and institutions can now borrow cryptocurrencies like Bitcoin (BTC) & Ethereum (ETH), among others, which means tracking this on balance sheets. This translates into tracking borrowed cryptocurrencies as intangible assets initially, then addressing any impairment that may result from changes in market conditions for the cryptocurrencies borrowed.
The liability of the borrowed cryptocurrency must also be tracked, properly accounting for an institution's or company's obligation to pay back the borrowed digital currency at some future date.
Accounting for crypto borrowing activities is particularly challenging in this light. Borrowing assets that fluctuate in value presents unique challenges to the process.
Solution: Ledgible Enterprise Accounting
With Ledgible enterprise accounting, you're equipped with the necessary tools to manage institutional and business cryptocurrency investments or asset management. You'll get features like:
- As-Of Date Analysis: Ledgible allows you to monitor your digital asset data over time through our asset table . Select from any previous or current date to get accurate pricing information for all assets on the specified date.
Counter-Party Mapping: Ledgible allows you to create contacts for blockchain addresses that you exchange with frequently. By identifying these addresses you can better identify reoccurring transactions.
For a variety of use cases in the world of crypto accounting, Ledgible has you covered:
- Accounting Firms: Monitor transactions, manage users, integrate to your existing ledger and use advance reporting.
- Businesses: Monitor all of your crypto financials in one place, connect to your favorite accounting software.
- Enterprises: Keep tabs on your portfolio, including forensic discovery of assets from forks and airdrops.
If you're interested in starting a free trial of Ledgible Crypto Enterprise Accounting, you can get started here.