Ok, we've made that sound dramatic, but hey! in the fast paced world of Web3 and DeFi, some drama is merited? That apart in the rapidly evolving landscape of Web3 and DeFi, navigating crypto bookkeeping for your company can be challenging.
Unfortunately, there is a noticeable gap in accessible ideas online. Recognizing this, we've taken the initiative to share our unmissable 6-point checklist.
Point 1 - Don't overhaul your legacy software like Xero and Quickbooks straight away
While not the most popular opinion out there, we are firm believers that you just don't overhaul your entire current system because you have crypto assets in your business. For most of the clients we work with, fiat and related compliance is still the chunk of their business. Whereas a smaller portion is digital assets.
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 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. We've successfully continued to use Xero for our clients that have exposure in the sector. It requires meticulous attention to maintain back workings and supporting documentation, but our bookkeeping practices have evolved over the years to ensure this is taken care of (psst...we have a blog on our methodology if you'd like a read)
Point 2 - Supporting documents and audit trail
This is absolutely critical for companies in the sector. You do 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 different wallet provider. A "point and time" value is otherwise quite difficult to justify. Koinly is great in that it captures all buy, sell and transfer transactions but again when crypto currencies are represented on a balance sheet you need to be able to clearly show a value as of a particular date.
Point 3 - Transactions should be set to deduct the correct VAT % at source
The VAT aspect is crucial. Most companies we work with are not a 100% crypto only. They have very traditional revenue models (such as SAAS subscriptions) with a variety of payment methods built it. VAT for these transactions need special attention as that follows the already established VAT directives.
Just because you maybe accepting payments in BTC, ETH, stable or other forms of crypto currencies, it doesn't change your VAT liability for particular transactions. When transactions are captured, it has a VAT rate added to it. Some could be missed out which may then lead to penalties if there is ever a VAT review from HMRC.
A good practice to follow is to ensure a quarterly VAT report is generated and reviewed thoroughly before submitting to HMRC.
Point 4 - Have an understanding of forks and airdrops
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 is of course talking about a hard fork. If you have new tokens to what was held before (which may not always happen), it's value may need to be recognised separately in the books.
Similarly airdrops can mean you have more tokens in your wallet which may need to be recognised on equal or comparable value in your accounting records. Having an understanding of what they mean to start with would help a in recognising or flagging these transactions for greater clarity.
Point 5 - Keep track of blockchain and transaction 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 transaction charges. It might even be hard to calculate them per transaction. In such a case it's better to capture them monthly as it would be faster and better value of peoples' time.
In any case, you must have a system in place to check if relevant crypto charges have been recorded
Point 6 - Conduct periodic internal reviews
This is a key point for us here in Evalua8. Regular monthly or quarterly internal reviews, particularly for smaller exposure levels, 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 how items are treated. 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 and correction of any discrepancies. Leave it too long and you might have to sink significant time in backtracking to identify and rectify the source of problems.
We hope this checklist has helped to form a basic structure around your crypto bookkeeping function. If you are having trouble setting up a proper finance function for your crypto company, talk to us and we could help you.
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.