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Tax Tech & Innovation

A square peg into a round hole: Fitting crypto into existing tax & accounting infrastructure

Trevor English  VP /

Trevor English  VP /

Tax & accounting professionals may face a steep task, akin to fitting a square peg into a round hole, as they try to fit cryptocurrency assets and transactions into the current tax reporting structure

Understanding the various accounting disciplines is far more difficult than playing with blocks. However, accountants and tax professionals just had another block added to their workload — cryptocurrency — and it simply doesn’t fit.

At its core, cryptocurrencies are square pegs being forced into the existing round holes of traditional finance and accounting. With IRS Notice 2014-21 guiding crypto tax standards thus far and with the Financial Accounting Standards Board and other organizations helping guide crypto accounting, the conversation around crypto thus far has centered around treating it like other traditional assets under standard accounting protocols. While this may work for a new kind of traditional asset, cryptocurrencies are inherently a new asset class with different operational structures.

The potential challenges arising are obvious. How do you fit an entirely novel asset class into tax & accounting rules built for traditional assets? Well, this necessitates some way to translate cryptocurrencies into traditional formats — to fit the square peg of crypto into the round holes that make up modern traditional finance. In other words, financial tools are needed to bridge the gap between crypto and traditional finance.

New tools needed

While there are already such software tools emerging that could greatly aid in the translation of digital assets into more traditional financial accounting frameworks, there are certain components that are critical for this to happen successfully. A few key ways this needs to be accomplished include:

Aggregation — First, the data needs to be gathered and collected. Cryptocurrencies present an immense amount of data, most of it unstandardized and unclassified. In order to even begin working on making everything fit together nicely, we need to mold it into a form we can use in the first place, even if that ends up being a square peg.

Aggregating data, and finding a software provider to do so, is a significant hurdle that many financial institutions and tax & accounting firms need to overcome in order to package crypto up into a nice little square box.

For more on the status of crypto regulation worldwide, check out the full digital version of the Cryptos on the Rise 2022 report from Thomson Reuters Institute and Thomson Reuters Regulatory Intelligence

Normalization —Unstandardized, unclassified, abnormal — these words could describe my sleep patterns around the tax deadline — but they also accurately describe much of the overall trove of crypto data. Normalizing crypto data means standardizing the naming conventions, properly categorizing transactions, as well as establishing standards around tax issues such as a cost-basis, fair value, and more.

There is a plethora of companies that jumped through numerous logistical and categorical hoops simply to help standardize small bits of cryptocurrency. And while this clearly demonstrates that this is a big challenge, both in the size of data and in the size of  transactions, it also shows the great need for robust standardization of cryptocurrency data.

Legibility — Finally, the last step in the process is legibility, or, making crypto data understandable and readable to general ledger tax & accounting systems. This means building the final bit of the bridge, allowing crypto data to flow from buy-side to sell-side to better enable the closing of books with ease.

Everything we’ve just discussed at a birds’ eye view encompasses billions to trillions of dollars of business investment to solve these challenges. The private sector is racing to create solutions for tax & accounting professionals to allow crypto, at the end of the day, to be handled like any other asset.

For crypto natives, this is great news. While many in the crypto sphere want to subvert traditional finance, it’s a lofty goal that likely will only occur through traditional pathways. Ensuring cryptos inevitable adoption means allowing tax professionals and accountants to be able to handle it just like they would other securities and assets, such as bonds and stocks.

So, all it takes to fit the square peg of crypto into the round hole of traditional finance is a little pushing, shoving, shaping, and molding with the aid of software solutions, and like magic crypto tax & accounting could become as easy as ever.

You can learn more about tax solutions surrounding cryptocurrencies here