So You Want To Be A Crypto-Accountant

Crypto accounting is still very much a black void for many. It holds a level of mystery, of faint questions of legitimacy, and most importantly a wide-open opportunity for those willing to learn a bit of technology to properly service clients or companies who very much need to ensure accurate and complete accounting. And, let's be real, that is every company.

There is a misconception from those early into the crypto-accounting space that it functions just like other types of accounting, but the reality is that, unlike industries such as e-commerce, SaaS, and similar, the underlying technology known as blockchain, web3, or 'crypto' is NOT an industry but a set of technologies meaning Web3 is not an industry at all but rather a technology with the potential to serve all industries. This means that being a crypto-accountant is not as simple as other types of accounting.

This article is going to walk you through some basic concepts to get you started if you have an interest in learning more about crypto-accounting or maybe connecting some dots in the journey you're already taking.

Basics of Crypto for Accounting

If you want to learn or better understand crypto accounting, you need to start with the basics of blockchain. I highly recommend getting a better understanding of the underlying technology & accounting that exists by reading through some great articles that outline those basics such as:

• Cost Basis and Why It's Important
• FASB Fair Valuation
• Accounting for The MERGE
• Web2.5 Podcast episode on Crypto Accounting

The TLDR version is blockchain is like a bank vault of safe deposit boxes made of glass all stacked one upon the other. You can see them all but you don't have access to them all, only the ones (if any) that you hold the key for. Same idea, different technology. Everyone can view the chain, the transactions, and the things inside the 'blocks', but unless you hold the keys for the accounts, you are not the one writing the chain as it is created.

Cryptocurrency and NFTs are much the same in that you can compare cryptocurrency to normal "fiat" currency (i.e. USD, Pesos, Euro, etc.) in that each currency has a different value and purposed use. You can trade them, exchange them, and do business with them. That being said, NFTs are where things get more complex and interesting. NFTs are like if you had a handful of quarters they released where they created one for each state with a different image, but imagine they only created a single one for each state. Then technically if you had a handful of 4 quarters that were each different (for our purpose let's say you have Ohio, Texas, Florida, and Utah), they'd each be a coin ("token"), but they wouldn't be the same and would be uniquely different and possibly hold different values. NFTs are sort of like that, except the use cases for them are much, much broader. I'll post a future article about the use cases around NFTs.

Of course, we don't have the time or ability to dig into the various other areas of cryptography use such as mining, minting, Decentralized Finance, and various other situations. That is best saved for a more in-depth meeting.

The Accounting of Digital Assets

For better or worse, depending on who you talk to, Web3 is here to stay. I use the power of AI to streamline basic work tasks to make my time more efficient. I've minted NFTs, and I play where I work so to speak. I'm not only knowledgeable in the accounting for digital assets, but find that enjoying the learning involved in the technology is supremely beneficial. So, how do you start if you want to be a crypto-accounting guru?

Let's go over the basics that will foundationally help establish good habits for crypto-accounting...

CHART OF ACCOUNTS

The best practice in this ever-changing world of wild-west accounting, and based on the established and potential regulations coming out of the US right now is to start by setting your chart of accounts up properly. The suggested methodology for this would be to show your digital assets on your balance sheet as intangible assets. At Cryptio.co we believe the best practice for this is to establish separate asset accounts for the top 5-10 material assets and a separate account for those assets that aren't so material. So for example, if you saw a bunch of USDC, DAO, and ETH coming into the wallets we would recommend you set up accounts in your intangible assets for each of those tokens and then one labeled as MISC. or Other to use for the random token that comes through from time to time. Additionally, you'll need to set up separate accounts when you hold NFTs or other specific use cases so that your assets are broken out at the proper level of granular thought that is best suited to transparently representing the whole of the financial picture.

In addition, you'll have to ensure that your Income Statement has the correct accounts as well. This will mean setting up an expense account for gas fees, which I typically like to have located near where I track bank fees for clients. The Gains and Losses Accounts you'll want to have in your chart of accounts in a way that matches your intangible assets, so if you are properly breaking out the material level of assets (i.e. ETH, DAO, USDC, etc...) then you will also want a Gain(Loss) ETH and so on. These accounts I typically show 'below the line' in expenses rather than part of the normal OPEX section of the Income Statement.

There is, of course (because nothing is that easy is it?) more that would be required for more complex clients who also are mining or dealing in DeFi and other complex areas of Web3. In those situations, I recommend working with a team like we have at Cryptio where we have over 50 years of experience between the members of our strategic accounting team to help guide you. For those more complex situations, there will be additional accounts surrounding revenues and other types of expenses you'll potentially need to consider we can help you set up properly the first time and save a world of hurt later!

CATEGORIZATION & MONTH-END CLOSE

Now that you've set up the client's COA, it is time to consider how to get all that data into the ERP you use for accounting. I, of course, highly recommend using a product like Cryptio over competitors because of the quality of the data we provide. For more information on why running nodes and indexers over scraping matters, read my previous article HERE. This will provide you a clear understanding of why we're different than the other guys, and how that should matter a lot to you as a crypto-accountant.

If you do use a product like Cryptio, you will have a clean and streamlined experience in implementing and fully setting up the environment in a way that walks you through getting all your client's on-chain data to the ERP pretty effortlessly. If not, the key things to remember are that you need to understand what you're looking at when you look at a transaction on-chain. Let's use the image below to better understand what you're seeing on the off-chance you are doing things manually.

First, your transaction hash can be thought of like 'confirmation number' when you've called into support and they are like "keep this number as it represents this singular situation". It points the user directly to this transaction in the blockchain. Just below is the status, this is whether or not this transaction was successful. This one shows it was, but sometimes you'll see transactions that show as failed. The Block is the location on this blockchain where this transaction lives, and the timestamp is the time and date at which that transaction became part of the blockchain. Below that lovely ad, the from is the wallet or hash address the transactions came from. For those coming from the fiat world of accounting think of these as the account number of a bank account to make it easier to initially wrap your brain around. Sometimes, like this one it will also show additional naming. In this case the owner added in "beaverbuild" to their naming, which adds useful context that might save you time figuring out where a transaction came from. The to is the opposite side of the transaction, and where the total was sent. Below who was sending and receiving is the value (amount sent), the fee, and the gas price at the time of the transaction. These numbers are the totals you'll need if you're manually creating journal entries for this specific transaction, as well as the information to help you establish the cost basis when calculating gains and losses at disposal/disbursement.

Dealing with the entries and calculations needed for manually understanding the flow of funds and what is needed is a more in-depth discussion. I welcome you to consider reaching out to me to schedule a time to chat further and figure out if Cryptio would be a good solution for you and your team to implement to alleviate the burden of manually having to handle on-chain transactions and also learn how we partner with the top names in the accounting and finance along with some of the largest companies in the Web3 space to ensure they have complete, accurate, and audit-ready data.

Wrap It Up With A Bow

To close this out, let's talk about the reason you should want to be involved in this amazing and brilliant technology in the form of crypto-accounting. The typical argument I hear from others who are concerned about the use cases for cryptocurrency, web3 as a whole, and AI are typically related to ideas that are incomplete or simply inaccurate. The truth is, used properly, the technology underlying blockchains is powerful in the most amazing ways. I've had conversations with people who are using this technology to make access to currency and business available at a micro-level in hyper-inflated populations. I've learned about NFT's being used to store data so that your identity and personal health records can be uniquely yours and truly owned by you rather than spread throughout the world in a risky and easy to hack broken system. My conversation have covered everything from the more commonly known use of NFT's as art to gaming to the very fundamental uses in day to day business and even big Pharma using them as a form of tracking system in their supply chain. I, personally, leverage AI in my daily tasks to eliminate the need for extra hours to complete mundane and simply tasks, to check that my writing (including this) is as concise and useful to the reader as possible, and ensure that if I'm able to do something that supports my team via AI, that I'm using it to my advantage and not my detriment.

The world is your oyster in the life of crypto-accounting if you're willing to dive down the rabbit hole and join me in Wonderland. If you find you are naturally curious, like to learn, and always asking questions as an accountant, then you might fit in nicely with the rest of us. As always, I welcome discussion, so long as it's friendly, and discussion on my posts and articles. I hope that this article has provided you some additional knowledge, and that if we're not already connected that you'll connect and reach out to chat more.