Traditional accountants vs crypto accountant
We spoke to a crypto client recently who said his first accountant was asking him to explain gas fees to him. In order for an accountant to do your accounting correctly, they need to have some sort of understanding of your business and in this case they need an understanding of not only your business but a totally new and emerging movement called Web 3.
Traditional accountants are used to working with bank accounts and credit cards. As a client, you will need to explain to them that transactions are now stemming from wallets and exchanges. You will also need to show them wallet addresses and explain to them the concepts of tokens.
Based on their understanding of these asset classes, the traditional accountant will then have to apply accounting standards like GAAP or IFRS in order to be compliant with local filing requirements at year end.
Crypto accountants have different processes
A traditional accountant will have a system or process in place to manage clients in a traditional FIAT world. When introducing a crypto customer, they will not have a process at all for this type of customer and will need to build them along the way or not build them at all and just service you as the client in the short term.
This could result in an expensive accounting bill for the crypto client as they will be billed for the inefficiency of not having a process and the need for that accountant to learn about the crypto world taking up the client’s time.
As a crypto client, it’s OK to choose a traditional accountant that you trust. But do not be fooled, if that accountant has not managed crypto clients in the past, then they should be honest with you and tell you they will be learning on the job with you and should potentially offer clients a lower rate.
Crypto accounting software - it matters
There are some softwares out there that can help with crypto accounting however most of them are more suited for enterprise or individual and more geared towards tax or reporting instead of accounting but they still provide some level of support.
Believe it or not, many traditional accountants won’t go out and find such software at the beginning. They will likely work with CSVs and excel to manage your crypto accounting and then make manual journal entries into their FIAT accounting systems. This will cost crypto clients quite a lot as there is a lot of manual work involved.
It is only after an accountant has felt the pain of using excel and CSV to manage crypto transactions when crypto software now becomes an option. As mentioned above, there are softwares out there like Bitwave, Cryptio or Koinly but they mostly focus on larger enterprise or tax and so it doesn’t fit the purpose of accounting but they are at least options that help minimise the administration of handling so many crypto transactions.
Here at Detof we’re working on software that is specific for crypto accounting and specific to crypto accountants who manage books for small and medium sized businesses or Decentralised Autonomous Organisations (DAOs). With Detof, we plan to support more crypto currencies and exchanges then simply the main chains like BTC or ETH and provide accountants more transaction context so they can label crypto transactions independently without constantly bugging their customers.
Crypto transactions software - a start
The most important piece of software to pick up is the ability to pull crypto transactions from digital wallets like Metamask for example or exchanges like Coinbase Pro, Kraken or Gemini. You will need to ensure that all crypto transaction data was pulled and captured in order to accurately do crypto accounting.
Once pulled, you’ll want to ensure the exchange rates from crypto to FIAT are all in place. You can pull these rates from CoinGecko or Coinmarketcap. Typically if you are using a tool like Cryptio or Koinly they would have a connection into Coinmarketcap or Coingecko otherwise just ask them to enable an exchange rate that is missing and they will do so for you.
Once all transactions are in, you can then label the crypto transactions and specify which transactions go into which account on your P&L and balance sheet. For example, you may have used Solana to purchase Ethereum. You will need to report the gain of that transaction into your revenue account on the P&L and then you will need to showcase a new asset on your balance sheet which would be Ethereum.
Once everything is labelled, you can push the transactions into your FIAT bookkeeping systems which could be Quickbooks or Xero for example. They would be pushed in via journal entries and it’s important to double check those journal entries and ensure they are captured correctly and fully reconciled.
Crypto invoicing software
Along with accounting software to help with crypto transactions, it would be wise to try using crypto invoicing and billing software. Some great tools out there include Request Finance or BaseNode. You can also try Utopia Labs but we noticed that they don’t really issue an invoice but mostly just make a payment.
These softwares will create invoices in crypto to be paid in crypto currency or even help with a conversion payment from crypto currency to FIAT or vice versa. The important part when using such software is to match your crypto invoice or crypto bill with the crypto transaction and close that invoice or bill in accounts payable or account receivable in your accounting system.
Seems simple enough but it requires a lot of manual work since you will need to cross check the invoice in your crypto invoicing tool with the transaction in your accounting system. Some tools do have integrations like Request Finance with Quickbooks and Xero that allow you to reconcile directly in Quickbooks or Xero instead of manually.
Crypto payroll software - Not really payroll more like payment
Some of the tools out there will promise crypto payroll which in reality is just a crypto payment. Payroll in our opinion is when a company pays someone and deducts all the necessary social and local taxes. So in the U.S, a payroll will deduct federal tax, medicare and all other social security taxes going from a gross salary payment to a net salary payment.
The tools currently out today providing crypto payroll services are mostly just providing a payment solution to pay freelancers or DAO contributors without deducting the federal and local taxes that you would normally see on a traditional FIAT payslip.
If a company does want to pay their employees in crypto and deduct these social charges, the process needs to be done manually with the accountant. The crypto client will specify how much he/she wants to pay the contributor or employee as a crypto gross salary. The accountant will convert the crypto to FIAT, making the necessary deductions in FIAT and then converting back to crypto for final payment.
This does cause a headache when a company has to reconcile its payments to local and federal authorities at year end and it is likely your accountant who will be managing that costly reconciliation process working on exchange rates and payment schedules.
Which option is better? Crypto accountant or traditional accountant?
In the end, both options are good options as long as the accountant is honest with the company in terms of their knowledge of the crypto space and their ability to execute on what they need from an accounting standpoint.
Of course a crypto accountant may likely be better versed in the crypto space and is aware how to treat crypto transactions to be compliant but there needs to be an aspect of trust when working with your accountant as they are handling sensitive data and provide advisory services that are critical to the success of your venture.
Hope this article helps. Feel free to reach out to Detof if you have any additional questions.