Estimated reading time: 4 minutes, 47 seconds

Cryptocurrency’s explosion in 2017 vaulted alternative currencies into the mainstream arena. Accountants suddenly found themselves dealing with a property-fiat hybrid with little regulatory oversight and plenty of interest from companies and consumers alike.

CPAs have learned a lot since the crypto revolution began, but one factor continues to cause trouble: cost basis calculation. To effectively track and manage crypto cost basis, accountants must understand both where the issue stands today and a predictive approach on how things will change as crypto evolves into the future.

Cost basis refers to the original cost of an asset, and this gets tricky when crypto enters the mix.

To calculate the cost basis for shares of stock in publicly traded companies, an accountant can simply compare the amount paid to the sale price and calculate the profit. But guidelines for cryptocurrencies provide far less detail. Without reliably accurate information, accountants struggle to calculate tax liabilities and keep accurate books.

Crypto’s cost basis complexity is multifaceted. Some cryptocurrency exchanges only provide partial transaction records. Because blockchain technology facilitates anonymity, blockchain records provide little information about the nature of a transaction or the people involved—you only get to know how much was transferred and which wallet received it. If a person or company fails to record the reason for a transaction, the accountant keeping the records may never discover it.

Excel spreadsheets have long been the best friends of accountants everywhere, but they can’t handle the volatile world of cryptocurrency. Human error and manual calculations don’t cut it when AI and automation do a better job. The more crypto assets that companies and individuals possess, the more complex their books become—with cost basis presenting one of the most significant challenges.

Despite the challenges, accountants only need a bit of insight and practice to master crypto cost basis.

The most common method for calculating cost basis in crypto today uses the “first-in, first out” method (FIFO). Say a client bought one Bitcoin a few years ago at $500. A few months later, that same client saw crypto prices climbing and bought five more Bitcoins at $1,000 apiece. After holding those investments for a while, the client finally sells one Bitcoin near the height of its popularity for $15,000.

Using FIFO calculation, the cost basis of the asset sold would depend on the cost of the first coin acquired. In this case, that coin cost $500, so the sale of $15,000 generated a profit of $14,500.

Because each cryptocurrency transaction qualifies as a taxable event, accountants must monitor every individual move and calculate the cost basis of each differently, depending on when clients acquired their coins. Movement from one wallet to another might not feel like a taxable event, but those transfers certainly count in the eyes of the authorities. Consumers and companies with dozens of coins in multiple wallets can quickly complete thousands of transactions, generating a web of financial uncertainty that no accountant could reasonably untangle.

With so much uncertainty, accountants must be deliberate and diligent to keep up with crypto cost basis for every transaction.

Clear and effective internal best practices take the guesswork out of crypto cost basis. The Wild West mindset that saw crypto buyers ignore the system are long gone. 

Today’s accountants must carefully record transactions of all types—and every cost along the way — to please an increasingly aware regulatory climate.

A full legal understanding of cryptocurrency won’t arrive for a while, but accountants can follow a few best practices to get ahead of the curve:

  1. Automate everything possible.

Microsoft did not create Excel spreadsheets with crypto markets in mind. Find smarter tools to pull data automatically from different wallets and exchanges. The less human intervention that recordkeeping requires, the cleaner those records will be.

  1. Structure wallets using charts of accounts.

Charts of accounts let accountants assign individual transactions to specific accounts. This is perfect for crypto, where users frequently open multiple wallets to silo their investments. By managing this segregation on the blockchain, accountants can decrease crypto complexity by using the same tools that created the digital currency in the first place.

  1. Manage permissions and oversight.

Just because someone owns a crypto asset does not give that person the right to be cavalier about compliance. Design corporate governance structures for crypto to match the same structures that govern fiat transactions. Cryptocurrencies retain value just like cash, and deserve the same rigorous oversight.

  1. Address mistakes immediately.

The longer a crypto mistake sits, the harder it becomes to correct. Not even the most powerful company in the world can reverse a completed crypto transaction. Keep proper logs and create systems with checks and balances to minimize mistakes and address them quickly when they do slip through.

As challenging as crypto accounting has become, accountants should aspire to understand the nuances to provide more valuable services to their clients. Blockchain technology isn’t about to disappear, and the cryptocurrencies built upon it will only continue to grow in popularity. Take the time now to learn the ropes now before the learning curve becomes even steeper. 

Alon Muroch
Alon Muroch is an Israeli entrepreneur, that has been developing code from an early age. He began working for many different startups over the past decade, taking many different roles. In 2014, he read the Satoshi white-paper which inspired him to explore and get deeply involved in the world of blockchain and crypto technology. He was a code contributor to Bitcoin, Ethereum, developed his own multi-sig P2P wallet, and later on co-founded 2017, where he serves as the company’s chief executive officer. Muroch continues to be passionate about the ways decentralized finance is transforming and opening up the traditional financial industry in a way never before imagined.
Last modified on Tuesday, 02 July 2019
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