Most people will never pay attention to the accountants and tax professionals that form the financial backbone of businesses and economies. The introduction of digital assets like cryptocurrencies has produced a new compelling challenge for the cryptocurrency and traditional finance world. How can professionals leverage intelligent automation to accurately calculate cryptocurrency cost basis, regardless of transaction volume or complexity of financial scenarios?
The preparation and research to solve this industry challenge required insightful discussions with the leading professionals for crypto accounting and tax, and even insights borrowed from the creation of traditional accounting software. The findings zeroed in on the technical challenges that could prevent the evolvement of the first automated cost basis tool for the industry. When technology is capable of becoming a powerful crypto tool, it can save businesses and investors hundreds of millions of dollars in tax liabilities while reducing the number of man hours required to calculate crypto gains & loss.
Three immediate and prominent obstacles were key to address when endeavoring to build a tool that will set the industry standard for automated cryptocurrency cost basis calculations.
The foundation of calculating cryptocurrency cost basis is reliant on having access to a complete record of data, such as historical transaction details and account history for each asset, wallet or exchange. Retrieving, verifying and calculating an unabridged data set of records is of the utmost importance. Without these records, the results produced become inaccurate and therefore unusable.
Smart software will leverage automation in conjunction with cryptocurrency and blockchain services. For example, users could link a crypto asset management platform to hundreds of exchanges and accounts quickly and easily. This instant and reliable access to customers’ cryptocurrency data means that data is always retrieved in real-time. Even if an exchange deletes data after a certain period of time, the platform will continue to store it for users forever.
By enabling complete access to users’ historical records, the cost basis tool can begin to operate using all the right data.
Transaction & Taxation Types
In the traditional financial ecosystem of fiat currencies, there are generally only two types of transactions, incoming and outgoing. This makes it simple for basic and even complex financial accounting scenarios. However, in the cryptocurrency universe of cryptographic digital assets, there is a wild assortment of transaction types that can occur within a single transaction, and when you add layers of security and third-parties – it can get far more convoluted. This makes it more difficult to track and monitor large volumes of frequent transactions. There are also other variables to consider such as, new digital assets, airdrops, forks, fees and subscriptions, vendors, payroll and more.
There was a time when accounting for traditional fiat currencies was simple, but like crypto that will change, and at a far faster rate. Moreover, as adoption rises and operations scale up, the difficulty increases tenfold. More customers, businesses, investors, institutions, and government guidance will birth new unique accounting and tax conundrums. Today, calculating gains & losses is at the most simple it will ever be. However, the changing landscape of legal regulation and guidance is already creating new questions for professionals every day.
Lack of Technology
To date, very little technology exists capable of effectively supporting crypto accountants, tax professionals and businesses. Crypto Accounting and other industry reports conclude that a lack of automation and technology is one of the key emerging challenges for the industry. Most accounting firms handling yearly taxation or audits will manually use spreadsheets and traditional financial tools to calculate gains & loss. This poses crystal clear obstacles for these professionals. Especially when considering the growing volume of transactions, complex accounting scenarios, unique variables and thousands of assets or transactions – all for one individual client. When repeating the process for each client the quality and accuracy of work can decrease, productivity drops and results can suffer.
The crypto accounting industry is in the preparation stage to require less human involvement and place more trust in smart technology to complete most of our laborious tasks and objectives. Tax professionals and business bookkeepers can often spend hundreds of hours a month solely focused on calculating gains & loss for clients, but this number is not sustainable for the future of crypto taxation – especially for enterprises or Fortune 500 companies. The sheer volume would require teams of teary-eyed professionals huddled over transactions and account sheets.
By reducing the man hours necessary for crypto financial reporting and incorporating automation, not only is there a reduction in the cost of man hours, but the results can be verified and checked for accuracy with even greater ease. Relying on manual verification is a duplication of efforts and can chew away at profits.
Addressing the cost basis series of challenges is one thing, but some companies are going ahead of the pack by integrating intelligent automation into the process. But even more importantly, the new tools being built must always be compliant, smart and exceptionally accurate. The combination of transparent access to user data, the understanding of transaction types and belief in enlightened technology is already forming and being launched as powerful software solutions to solve for the almost impossible.