If crypto accounting were as straightforward as traditional accounting, the market would have jumped headfirst into crypto years ago. As it stands now, even experienced accountants struggle to understand how risk interplays with crypto’s emerging market and how the underlying technologies protect investors.
With so many challenges, everyone deserves a bit of help on the crypto accounting front. Regulators need a steady hand to guide their decisions. Entrepreneurs need assistance to manage risk in their projects. No matter where you operate in the crypto world, your own accounting could probably use a boost.
Fortunately, most struggles in crypto accounting stem from simple human error. Watch for these five mistakes to keep your balance sheets neat:
1. Incorrect Cost-Basis Calculations
Your cost basis depends on when you initially acquired a crypto asset. If you bought bitcoin in 2017 and used it to trade on other exchanges, you cannot accurately report the cost basis of those subsequent crypto assets without including the data behind your initial purchase.
Be cautious when calculating cost basis in crypto. Double- and triple-check assets, and always follow the rule of FIFO (first in, first out). Every crypto transaction qualifies as a taxable event, so keep detailed records about when you sell and when you transfer coins to new wallets or exchanges.
2. Incorrect Spreadsheet Formulas
Even the smartest people make the simplest mistakes. TransAlta, for instance, once lost 10% of its profits for the year because of a spreadsheet error.
Spreadsheet errors are hard enough to spot in traditional accounting, where everyone knows what things should look like. Crypto accounting is so new and complex that you might not recognize an obvious error until it’s too late.
If you must use spreadsheets instead of more advanced tools, exercise extreme caution. Try to find a platform or service where you can reconcile your calculations and results to confirm accuracy. Rely on individual human accuracy as little as possible to avoid spreadsheet errors.
If you can minimize dependence on human accuracy, you can more easily avoid spreadsheet errors.
3. Incorrect Labeling Of Transactions And Accounts
Not all entries are created equal. If you mislabel crypto transactions -- or worse, fail to apply labels at all -- you could quickly find yourself answering unpleasant tax questions with expensive answers. Even if the tax collector doesn’t come calling, tracking and managing unlabelled transactions is a tedious and laborious process.
Different blockchains provide all sorts of hash and encryption info. One small slip could easily lead to a massive, time-consuming headache. Organizing that info isn’t easy, so be diligent about the process you follow to keep your asset categorization efficiently organized. Building up and defining your own chart of accounts from the get-go is a great way to be efficient and prepared when managing your assets.
4. Susceptible Security
Security systems are only as strong as their weakest links, and those weak links are invariably human beings. Experian’s "Managing Insider Risk through Training and Culture" report found that 66% of surveyed professionals labeled employees as their biggest concern in the face of cyberthreats. For example, spreadsheets from Google or Microsoft are useful, but they lack the security necessary for tracking and managing private and sensitive crypto data. Files can easily be shared outside of secured networks with minimal features to ensure security
Crypto and blockchain offer incredible security benefits, but those benefits don’t matter when humans lay out the welcome mat. Common mistakes include clicking unfamiliar links, opening unknown attachments, entering personal information into fake accounts and sharing private information outside of an organization's secured network.
Preventing human error and malicious intent and reducing exposure to cybercrime are some of the most important components for companies handling crypto assets.
5. Bad Calculations Based on Inaccurate Exchange Fees
Different exchanges provide different data for different calculations. If you rely on information from one to make calculations about another, you could quickly start a chain of crypto accounting errors that will take a ton of time and effort to correct. Additionally, some exchanges only offer a limited view into your account history.
Humans typically make mistakes when manually calculating exchange fees without the help of automated tools. Avoid putting yourself in a bad situation by using software to keep track of fees and calculations automatically. Where humans might assume one measurement is as good as another in close cases, automated software will always tie the correct numbers together, saving money and difficulty in the bargain.
Crypto accounting is inherently complicated and confusing due to its cryptographic and anonymized nature. Even the most experienced experts can easily fall prey to basic mistakes when the complexities of crypto get piled on top of existing accounting requirements. Make sure to exercise extreme caution and utilize technology when performing crypto accounting to avoid these common mistakes and keep your books efficiently organized and accurate.
