13 Jul Solving the Complexities of Crypto Tax & Accounting With the Experts at Ledgible
As crypto matures and continues along its path of inevitable adoption, so too does the importance placed on adequately accounting for crypto as an asset class and a source of income.
Cryptocurrencies at their core were not designed to fit into traditional financial systems, after all, that’s where some of their primary benefits over fiat and banking systems are found. For crypto natives, trying to fit the square peg of crypto into the round hole of traditional finance is done begrudgingly, often come tax time – or in the case of businesses with crypto, monthly to close books. In the US and other regulated economies, these actions are necessary evils to maintain crypto – but accounting for crypto neither has to be hard nor detrimental to the overall crypto ecosystem.
But let’s back up for a moment.
A Paradoxical Equation
As companies and funds continue to make the push for a Bitcoin spot ETF and other financial products involving cryptocurrency functioning in the more traditional financial ecosystem, we’re left with a somewhat paradoxical equation.
Mass crypto adoption – particularly within hedge funds, institutions, and other large organizations – is a net positive for the space. It will drive innovation and ensure the continual permanent adoption of digital currencies. But the paradox here is that this adoption, the end goal of most in the crypto space, will come at the hand of creating a symbiotic relationship between crypto and financial regulation and process.
We’ve seen numerous crashes of companies like Celsius, Three Arrows Capital, and others as we fall into what is likely another crypto winter. All of this is reminiscent of crashes and outcomes seen in traditional financial markets under greed and mismanagement, among a plethora of other pernicious behaviors. Historically, these outcomes have brought greater scrutiny on the space – more regulation – but have all worked to build a more stable financial ecosystem for consumers and investors alike.
So we’re left with a paradox, the merging of decentralized digital currency and centralized regulation. How then, can this paradoxical situation be solved with an outcome that is both beneficial and foundational to the growth of crypto, as well as one that maintains the benefits of cryptocurrencies at their core?
While new regulation is one piece of the puzzle here, it has yet to come. There have been plenty of rumblings and discussions, but nothing substantial has come in the space of US-based or even global new regulation in the crypto space – so far. The other piece of this puzzle is simple – bridge the gap between crypto and traditional finance in a way that maintains the structure of both spaces. Create a symbiotic relationship between both industries, allowing both to lift the other up.
This is the solution Ledgible is solving for.
Building a sturdy bridge between crypto and traditional finance rests on being able to match crypto into the world of traditional tax and accounting. The unglamorous underpinnings of traditional finance, sure, but if crypto can be fit into the tax and accounting space with ease, then we solve the paradoxical equation above.
Rather than try to reinvent the wheel when it comes to crypto, aggregating, normalizing, and making crypto data Ledgible for traditional finance and accounting allows for CFOs, accountants, and tax professionals to properly account for crypto in their workflows. Just as they would with traditional assets, like stocks or bonds.
This also means that what makes crypto, crypto – the decentralized nature, 24/7 trading, staking, Defi, protocols, and more – gets to continue making crypto, well, crypto. Rather than further integrating crypto into traditional assets, alongside stocks & bonds, the financial ecosystem is able to keep traditional financial products in one vertical, and crypto assets in their own vertical, easily bridged by solutions like Ledgible.
All this going to say, ensuring the inevitable adoption of cryptocurrency as it continues its path to the mainstream doesn’t have to strip the asset class of what makes it unique. Rather, with the proper tax and accounting tools quietly bridging the gap between crypto and financial regulation and accounting, crypto can keep doing what it does best.
So, at a high level, it can be understood how bridging the gap between crypto and traditional finance is not only the optimal path, but one being spearheaded by the experts at Ledgible. So then, what specific challenges is the team solving?
Solving the Tax & Accounting Problem
In IRS Notice 2014-21, 2014-16 I.R.B. 938, the agency outlines basic guidance for digital currencies. For Federal income tax purposes, digital currency is treated as property. From there, current tax law applies – but what does this really mean?
As called out before, bridging the gap between crypto and traditional finance means properly connecting bulky regulation, like that from the IRS, to crypto. Crypto transactions are becoming more and more scrutinized by the IRS. With still not definitive, custom-tailored guidance around crypto coming from the IRS or other governing bodies, there’s still a lot of room left for interpretation with digital assets. Noted in another article on crypto tax guidance,
“US tax law requires US citizens to pay tax on income from any source derived and much of the tax code addresses the taxability of various income types – or how income is earned. For example, wages incur social security taxes but interest payments do not. Taxes paid on capital gains are usually lower than on ordinary income. In some cases the tax treatment of income depends on the legal structure of the business as well as how many hours a taxpayer actively participates in an activity.”
If your eyes just glazed over, hang tight. Financial regulation and tax code is no fun – especially in the crypto space, which is why Ledgible ingests that tax code and quietly and automatically applies it to crypto holdings and trades… making it Ledgible for… well, hopefully, you get the point.
The Ledgible platform is solving the crypto tax and accounting challenge by taking all of the work out of it. Think of the platform as the middle man, ingesting non-standard crypto data on one end, and spitting out standardized trade and accounting information on the other.
But with the problems identified, and properly solved for – how does all of this make crypto tax and accounting easy and even beneficial to the user?
The Benefits of Properly Accounting for Crypto
At the beginning of this article, it was called out that properly accounting for crypto “neither has to be hard or detrimental to the overall crypto ecosystem.” Keeping true to that statement, let’s discuss the potential benefits.
Crypto winters are perhaps the greatest time to discuss proper crypto accounting as in downturns and times of heavy selling, there’s no better time to leverage crypto to reduce your overall tax burden. Not only are crypto losses fully deductible, but for the time being you can use strategies like tax-loss harvesting to fully maximize your benefits.
Properly accounting for crypto in upswings is also necessary, as ensuring that you don’t make trades that leave you with a potential massive tax bill, or at risk of audit, requires some planning – and using a crypto tax tracking tool.
Put simply, the benefits of proper crypto accounting mean that crypto traders can play by the rules, decreasing audit risk, and even leverage existing rules to their benefit. Not only this, but as the gap between crypto and traditional finance is bridged, the barrier of entry into the crypto ecosystem lessens, driving up interest and otherwise bringing greater success into the space.
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