Cryptocurrency Tracking for Accountants

As the global cryptocurrency market cap reaches approximately $2.5 trillion as of August 2024, the need for specialized tools and certifications in crypto asset management and taxation has never been more important. Accountants can access advanced software solutions specifically designed for tracking, managing, and reporting cryptocurrency transactions.

Professional certifications like the Certified Cryptocurrency Tax Expert (CCTE) and blockchain-related accounting courses are becoming essential for accountants who want to stay updated in this field. These tools and certifications are important for accurately managing cryptocurrency and ensuring compliance with emerging regulations.

This blog guides you through essential information and tools needed for effective cryptocurrency tracking. You will understand the importance of accurate cryptocurrency tracking. You will learn how to manage detailed transaction records and ensure compliance with tax regulations.

Information Required by Crypto Accountants

Below is the necessary information that every crypto accountant must know:

Balances and Balance Changes

Accurate balance tracking is crucial for financial reporting and compliance. Accountants must ensure that all cryptocurrency balances are correctly recorded to provide a true picture of an entity’s financial health. Accurate tracking helps in preparing financial statements, ensuring compliance with regulations, and avoiding legal issues. It also helps in detecting discrepancies or fraudulent activities early on.

Regular updates and reconciliation of cryptocurrency balances are essential to maintain accuracy. This involves periodically verifying the balances recorded in financial statements with actual balances on the blockchain. Reconciliation helps identify and correct any discrepancies, ensuring that the financial records are up-to-date and accurate.

Bitquery provides detailed balance and transaction updates across multiple chains, including Ethereum, Arbitrum, BSC, Base, Matic, OpBNB, Optimism, Solana, and Tron.

How are Balances & Balance Updates useful in Crypto Tracking?

For example, the Solana Balance API allows you to monitor real-time balance changes for specific addresses on the Solana blockchain. Accountants can track the continuous flow of assets in and out of specific addresses on the Solana blockchain. You can access the query here.

Consider the following balance updates for two Solana wallet addresses:

Wallet Address 1: TH65HeDYxozNuDBzuVqQFdpy5K6cDtHv5B2paFuGbLx
Balance Change: -0.001 SOL
Transaction Fee: 0.000015 SOL
Block Time: 2024–08–09T09:53:11Z
Block Height: 261591696
Transaction Signature: 5WruKnCjHT1z67WoGNaR1ePW7NZkCq3he98UMyuTLvsUxKvkQTu59ZisY7QRZn54Pz6z5sAPr5rZe4ydxEvtDLny

Wallet Address 2: HcU7GQwkBgejyp3RTJQrSbcS2EpWUpvYHo4WFHWBSwqD
Balance Change: +0.001 SOL
Block Time: 2024–08–09T09:53:11Z
Block Height: 261591696
Transaction Signature: 5WruKnCjHT1z67WoGNaR1ePW7NZkCq3he98UMyuTLvsUxKvkQTu59ZisY7QRZn54Pz6z5sAPr5rZe4ydxEvtDLny

This is particularly useful in:

• Accurate Record-Keeping: The balance updates provide detailed information about every change in the account’s balance. In this case, Wallet Address 1 sent 0.001 SOL and paid a transaction fee of 0.000015 SOL. Wallet Address 2 received the 0.001 SOL. By recording these balance changes, accountants can maintain accurate and up-to-date records of all financial activities associated with these wallets.
• Audit and Reconciliation: Balance updates are crucial for reconciling financial records. By comparing the recorded transactions in internal accounting systems with real-time updates from the blockchain, accountants can ensure that the books accurately reflect all transactions. For example, if Wallet Address 1’s internal records don’t match the blockchain’s reported -0.001 SOL (plus the fee), it could indicate a discrepancy that needs investigation.
• Verification of Transactions: Each balance update is tied to a specific transaction signature and block time, making it easier to verify the transaction’s authenticity and timing. During an audit, accountants can cross-reference these details with the internal transaction logs to confirm that all transactions were recorded correctly and occurred as reported.
• Monitoring Transaction Fees: The balance updates also include information about transaction fees, which are an important aspect of cost management in cryptocurrency accounting. Knowing the exact fees paid allows accountants to account for these costs accurately, ensuring that the net balance is correctly reported after all deductions.
• Fraud Detection: Regularly monitoring balance updates helps in identifying unauthorized or unusual transactions. If Wallet Address 1 had an unexpectedly large outflow or a pattern of small but frequent transactions, it could trigger further investigation to determine if there is any fraudulent activity.

Transaction Details

Tracking cryptocurrency transactions accurately is crucial for accountants. Each transaction must be recorded with the date, amount, sender, recipient, and transaction fees. This detailed record-keeping ensures that all financial activities are accounted for and can be audited if necessary.

Bitquery offers a range of APIs to help accountants track cryptocurrency transactions seamlessly. The Arbitrum Transactions API, Token Transaction API, Solana Transaction API, EVM Transaction API, and Bitcoin Transaction API provide robust solutions for blockchain data integration.

How are Transaction Details useful in Crypto Tracking?

Let’s consider an example to understand how transaction details are useful in accounting. We’ll examine two Bitcoin transactions to see how the data can be leveraged for accurate record-keeping and auditing. You can view the query here.

Transaction 1:
Date: July 20, 2023, at 23:43:16
Block Height: 799586
Input Value: 0.05760238 BTC ($1,717.57 USD)
Output Value: 0.05756361 BTC
Transaction Fee: 0.00003877 BTC ($1.16 USD)
Transaction Hash: d48c80c76094d3dac0f955df260e3ef8a0e80e1e9e30ba3f359fb9a51ce28a7d
Number of Inputs: 1
Number of Outputs: 2

Transaction 2:
Date: July 20, 2023, at 23:43:16
Block Height: 799586
Input Value: 0.03471422 BTC ($1,035.10 USD)
Output Value: 0.03467545 BTC
Transaction Fee: 0.00003877 BTC ($1.16 USD)
Transaction Hash: d25e0be2ec83e245c83b2cc0beb117e832ad2ed09b76dc1c4b86f98840e93274
Number of Inputs: 1
Number of Outputs: 2

• Each transaction provides specific details such as the input value, output value, transaction fee, and the time the transaction was processed. For example, if this wallet belongs to a business, accountants can record the exact amount of Bitcoin spent (0.05760238 BTC) and the transaction fee (0.00003877 BTC) associated with the transaction. This ensures that all expenses are accurately documented and reflected in the financial records.
• Transaction details such as block height, transaction hash, and the precise amounts involved are crucial for auditing. Accountants can use this data to verify that the recorded transactions match the blockchain data. For example, if the internal records show a different fee or transaction amount, the discrepancy can be quickly identified by cross-referencing with the blockchain data, ensuring that all financial statements are accurate.
• By analyzing transaction inputs and outputs, accountants can determine the net spending or income generated by a wallet over a specific period. In this example, the difference between the input value and the output value (0.05760238 BTC — 0.05756361 BTC) reflects the amount spent on the transaction fee. Tracking such details over time helps in understanding the operational costs and profitability of cryptocurrency transactions.
• Detailed transaction records are essential for calculating capital gains or losses. For instance, knowing the exact amount of Bitcoin involved in each transaction allows accountants to determine the cost basis and selling price for tax purposes. If the Bitcoin was bought at a lower price and sold or transferred at a higher value, the difference would be subject to capital gains tax. Accurate records ensure that these calculations are precise and compliant with tax regulations.
• Regularly reviewing transaction details helps identify any unusual activity, such as unexpected large transactions or multiple transactions occurring within a short time. For example, if a wallet that typically processes small transactions suddenly shows a large input or output value, it could indicate potential fraud or unauthorized access, warranting further investigation.

Wallet Information

For effective cryptocurrency accounting, it’s essential to manage and document wallet addresses properly. Each wallet address must be tracked to ensure that all transactions associated with it are recorded accurately. This includes noting the type of wallet (hot, cold, hardware) and its purpose.

Accountants must track these different types of wallets to ensure that all assets are accounted for and that security measures are in place. Bitquery provides detailed wallet information through various APIs, offering insights across multiple blockchain networks. These APIs help accountants manage and document wallet addresses effectively, ensuring that all transactions and balances are tracked accurately.

Tax Information

Cryptocurrency transactions can have significant tax implications. Accountants need detailed reports to calculate capital gains, losses, and income accurately. These reports must include information about the acquisition and disposal of assets, transaction dates, and the value of the assets at the time of the transaction. Accurate tax reporting helps in complying with tax regulations and avoiding penalties.

Proper documentation is essential for tax reporting. Accountants must maintain records of all cryptocurrency transactions, including the date of acquisition, cost basis, date of sale, and proceeds from the sale. This information is necessary to calculate taxable gains or losses and to ensure compliance with tax laws. Detailed documentation also provides a clear audit trail, facilitating the verification of reported figures by tax authorities.

Bitquery offers a comprehensive crypto tax software solution that simplifies the process of calculating and reporting taxes

Forensic Accounting and Crypto Tracing

Forensic accounting in the cryptocurrency world involves tracing and analyzing digital transactions to detect fraud and financial misconduct. In this section, we will learn about the tools and techniques used in crypto tracing.

Using Tracing Tools

Tracing tools are essential for crypto accountants as they help in monitoring and analyzing cryptocurrency transactions. These tools allow accountants to track the flow of digital assets, identify suspicious activities, and maintain accurate financial records.

By using tracing tools, accountants can ensure compliance with regulations, detect potential fraud, and provide detailed transaction reports. These tools streamline the process of tracking complex transactions across multiple blockchain networks, making the task more manageable and efficient.

Bitquery’s Crypto Investigation Services offer comprehensive solutions for tracing and analyzing cryptocurrency transactions. These services provide forensic accountants with the tools needed to uncover fraud, conduct thorough investigations, and ensure compliance with regulatory standards.

Moneyflow Tracing Tool

Moneyflow is an advanced tracing tool customized to meet the needs of crypto accountants. It has powerful features that enhance the accuracy and efficiency of financial tracking and compliance. Here are the core features of the tool:

• Address Labeling & Entity Resolution: Moneyflow automatically labels and groups addresses. It identifies entities that control multiple addresses based on transaction patterns. This feature helps in simplifying the analysis by showing that one entity may control several addresses, making it easier to understand the flow of funds.
• Identifying High-Risk Entities: The tool effectively identifies interactions with high-risk entities such as Tornado Cash, mixers, and previously flagged wallets. This capability is needed for ensuring that transactions involving potentially illicit actors are flagged for further investigation.
• Transaction Filtering Based on Amounts: Moneyflow allows for filtering transactions based on specific amounts, using FATF indicators to identify red-flag transactions. This feature is essential for detecting potential money laundering activities, and ensuring compliance with global financial standards.
• Auto Trace From/To an Address: The tool automatically traces transactions from or to a specific address, providing a clear view of the transaction history. This feature helps in quickly identifying the origin and destination of funds, making it easier to track and audit cryptocurrency movements.

Challenges in Tracing Cryptocurrency

Cryptocurrencies are designed to offer a high level of anonymity and privacy, making it difficult to trace transactions. This poses a significant challenge for forensic accountants who need to identify the parties involved in fraudulent activities.

• To overcome these challenges, forensic accountants use techniques such as analyzing blockchain data to identify patterns and behaviors.
• This includes monitoring transaction frequencies, amounts, and addresses involved. Advanced algorithms and machine learning models are also employed to detect unusual activities and potential fraud.
• Obfuscation techniques such as mixers and tumblers are commonly used to hide the origins of cryptocurrency transactions.
• Mixers combine multiple transactions to obscure the transaction path, while tumblers break down transactions into smaller parts, making it harder to trace them back to the original sender.

Despite these techniques, advanced tracing tools can still identify patterns and trace the flow of funds.

Compliance and Reporting Standards

Adhering to accounting standards for digital assets is crucial for maintaining transparency and ensuring accurate financial reporting. These standards provide guidelines on how to account for and report cryptocurrency transactions, helping organizations stay compliant with regulatory requirements.

Traditional financial reporting focuses on fiat currency transactions and standard financial instruments. In contrast, crypto-specific reporting requires additional details such as transaction hashes, wallet addresses, and blockchain data. Forensic accountants must be familiar with these differences to ensure accurate and compliant reporting.

Critical Aspects that Crypto Accountants Must Know

Here are the critical aspects that crypto accountants must know:

Country-Specific Laws and Regulations

Understanding the global regulatory landscape for cryptocurrencies is crucial. Different countries have specific laws and guidelines that accountants must adhere to.

• United States: The IRS provides guidelines on how to report and pay taxes on cryptocurrency transactions. FinCEN requires reporting of certain transactions to prevent money laundering and other illicit activities. Read more on tracing bitcoin seized by the US government and where to report crypto scams in the US.
• India: In India, cryptocurrency regulations are evolving, and the government has introduced guidelines for taxing crypto transactions. Accountants in India must stay informed about these regulations and handle crypto reconciliation carefully. This includes maintaining accurate records of all transactions, understanding the tax implications, and ensuring that all crypto activities comply with the regulations set by the Reserve Bank of India (RBI) and the Ministry of Finance.
• European Union: The GDPR sets standards for data privacy that impact how cryptocurrency data is handled. The EU also has anti-money laundering (AML) directives that require specific compliance measures.
• Other Regions: Countries like Australia, Canada, and Japan have their own regulations regarding cryptocurrency. Accountants must stay informed about these to ensure compliance. Learn more about these regulations at Bitquery Law Enforcement Solutions.

Conclusion

Tracking and managing cryptocurrency is essential for accountants in today’s digital world. Knowing how to keep detailed transaction records, manage wallet information, ensure tax compliance, and use tools like Moneyflow is key. It’s also important to understand the laws in different countries, follow security measures, and stick to best practices.

By using the right tools and staying updated on the latest trends, crypto accountants can handle digital assets effectively. They can also provide valuable insights and services to their clients. Continuous learning and working with legal and compliance teams help maintain accurate and honest financial reporting in the fast-changing world of cryptocurrency.

• Where to Report Cryptocurrency Scams in the USA
• Crypto Tracing Services for Lawyers
• Top 10 Chainalysis Alternatives

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Written by Aarthy

Cryptocurrency Tracking for Accountants was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.