Why Is Cryptocurrency Accounting So Damn Hard?

In the era of fast-developing blockchain solutions and adoption, the Web 3.0 transition is becoming only more apparent. Using digital automation tools allows companies to operate at an efficient level with less resources that wouldn’t have been otherwise possible. In the context of digital automation for cryptocurrency tax calculation and accounting, there are several points to touch on. 

Without any automation in the accounting process of cryptocurrency transactions, the manual reconciliation of cryptocurrency transactions quickly becomes untenable at scale due to the nature of crypto’s complexity. There are many sources of transaction data that need to be consolidated into one place. These sources of data can take form as a CSV file, connected exchange via API, and public address of a particular blockchain.

The automatic pulling of blockchain data once a public wallet address is synchronized and the pulling of transaction data from an exchange when a read-only API is synchronized are two key points in cryptocurrency tax automation. Once exchange APIs and wallets are synchronized on a cryptocurrency tax automation tool, cryptocurrency balances should be tracked with all historical transactions visible in a ledger. No opportunity for data collection can be missed during reconciliation as the cryptocurrency data used must be able to be audit-proof.

The inflows and outflows of cryptocurrency transactions should be matching at all times to therefore be audit-proof. There should be a universal standard protocol in the crypto space when it comes to compliance. It should be of imperative importance for companies and individuals who are actively engaging in cryptocurrency activities to consolidate all data points into one place for reconciliation.

If one transaction or a fee value is missing, the entire book of entries is thrown off by inaccuracies in the cost basis calculation. Every cryptocurrency accounting platform is dependent on the validity and accuracy of the data sources that are synchronized. A missing CSV file of transactions would create a signal of deviations due to missing transactions on a platform that catches inconsistencies.

In the case of Read-Only APIs being used to pull transaction data from exchanges onto the accounting platform in question, there is a 100% dependence on the exchange to provide accurate data. Exchange API weaknesses are a concern because there is no universal structure or standard on how or what data points cryptocurrency exchanges provide to users. It’s not uncommon for some crypto exchanges to change their APIs without prior notice.

When there is a significant enough change in an exchange’s API documentation, it may break a current connection. If this happens, the accounting platform would need to be intelligent enough to pick up on the API error or any issues occurring during the data request. Rounding is a serious issue too, some exchanges don’t necessarily provide all the data necessary to get fool-proof transaction entries. In the example of Ethereum, there are 18 decimal places that are possible but some exchanges may round at an earlier decimal place when data is pulled from their API, this creates minor inaccuracies in cryptocurrency transaction values which quickly accumulates over time. 

Aggregated market indexes play an important role in the ability for cryptocurrency accounting automation to exist. With existing blockchain data being public, this data can be pulled and used to calculate cryptocurrency values using their transaction timestamps through a market aggregated index. There are a few notable market aggregator indexes like CryptoCompare and CoinMarketCap.

These market aggregators are required tools for accounting automation tools to pinpoint pricing data when transactions are pulled from a blockchain. This doesn’t apply to exchange transactions. In that case, pricing data is pulled directly through the exchange itself. 

One major challenge from the reliance of cryptocurrency aggregated market indexes is that if there is no pricing data available on an actively traded token, pricing data would have to be manually entered through the accounting solution as the automation would not be possible. Cryptoworth One is an example of an accounting platform that addresses the pricing data limitations and transaction identification challenges by enabling a modifiable open chart of accounts. 

Cryptocurrency tax automation requires a solid foundation of trust and reliability from the sources of transaction data. Assuming the trust and consistency is there, the automation of cryptocurrency accounting procedures would reduce overhead costs and facilitate compliance at even the startup level. Such automation tools are necessary for the support and growth of the industry as a whole. Solving major compliance and scalability barriers is the goal of cryptocurrency accounting innovation.