How to approach crypto accounting infrastructure
Introduction
At Loop Crypto, we work with many companies considering accepting crypto payments or stablecoin payments for the first time. One of the questions we hear most often is what does this mean for my books? How should I think about cryptocurrency accounting? Sometimes it is phrased a bit more bluntly: Is my accountant going to hate me if I bring crypto accounting into the equation?
With this article, we will tackle this topic head-on, dispelling the concerns and addressing the specific questions we come across most often. The good news is that accounting for cryptocurrency has come a long way in the last several years. One particular bright spot is that a flood of talent has come into the space with both the big four accounting firms and a crop of highly specialized crypto accounting firms springing up to serve this burgeoning need in the financial ecosystem. Across the globe, some of the accounting rules and standards are still being written, but there has been significant progress. Many credit the Financial Accounting Standards Board (FASB) with being proactive in providing guidance around how to treat crypto on financial statements.
All this is to say, don’t let fear of accounting stop you from growing your business by adding a new payment method. Across the world, consumers and businesses are demanding the ability to pay in crypto, particularly stablecoins. In emerging markets, 1 in 3 crypto holders have used a stablecoin to make a payment, and B2B invoicing volume in stablecoins is now in the tens if not hundreds of billions of dollars. At the same time, more and more corporations are becoming comfortable with crypto and stablecoins on their balance sheets. Already, 89 public companies hold Bitcoin on their balance sheets, and 56% of Fortune 500 executives say their companies are working on on-chain projects. Every business needs to be thinking about how they build out a robust crypto accounting infrastructure and ensure they are prepared to embrace this emerging technology and payment method.
The roadmap
Crypto accounting is a massive topic that can be taken in many directions. For this article, our goal is to equip you with the knowledge you need to understand the accounting implications of accepting a digital asset as a form of payment. To do that, we organize this content into three key areas:
1) The accounting rules around accepting payments for goods and services - Before we can jump into the intricacies of crypto accounting, we need to start by laying a foundation and a basic understanding of how a business needs to account for a payment in their books when a customer pays them for a good or service.
2) The accounting rules around buying, holding, and selling crypto - You may see the term “digital asset” used to refer to crypto and stablecoins, particularly among those in traditional finance. This is not a coincidence. In most jurisdictions, crypto and stablecoins are treated as intangible assets. This has implications for how crypto is treated when it comes to tracking these assets on your ledger and preparing financial statements.
1) Accounting rules around accepting payments for goods and services
When a merchant accepts a payment, several accounting and tax requirements come into play:
Accounting Requirements
Recording the sale: The transaction must be recorded in the merchant's books, typically as revenue or sales income.
Accounts receivable: If payment isn't received immediately (e.g., credit sales), it should be recorded in accounts receivable.
Payment processing fees: Any fees associated with accepting the payment (credit card processing fees, Loop Crypto fees, etc.) should be recorded as expenses.
Inventory adjustment: For product sales, inventory records must be updated to reflect reduced stock.
Cash reconciliation: For cash payments, merchants need to reconcile their cash drawer or register with sales records.
Sales returns provision: Setting aside a portion of revenue for potential returns or refunds.
When it comes to taxes, these requirements can vary significantly based on:
Business structure (sole proprietor, LLC, corporation)
Geographic location and applicable jurisdictions
Payment methods accepted
Industry-specific regulations
Business size and transaction volume
Note: Some states have small seller exemptions with minimum thresholds before collection is required.
On the topic of seller exemptions, it’s important to note that many states also have small seller exemptions that exempt sellers who meet minimum thresholds based on revenue or transaction counts from having to collect and remit taxes. While not a strict rule, many states’ thresholds are related to either a sales volume threshold (commonly $100,000 in annual sales to customers in that state) and/or a transaction count threshold (commonly 200 separate transactions to customers in that state). Be sure to check with your tax experts. These requirements apply regardless of the customer’s payment method - crypto or fiat.
Recording a sale
At its core, accounting and tax preparation rest on a business's ability to properly record a sale. Keeping good records of money moving in and out of your business is how merchants can determine the health of their business and properly report on their earnings and losses.
Bookkeeping is the process of recording the details about transactions to the books (ledgers) of the company. At one point, this work was done manually and in literal books, but in modern times, specialized software, like payment billing systems, helps merchants create an entry in a ledger with an amount, a description, a date, and some notion of where the money is coming from and where it is going.
Accounting turns this data into reports like the balance sheet, statement of cash flows, and income statement, which can be used to draw conclusions about the health of the business. Since the transaction-level data is already digital, software is able to help automate a lot of this process as well. A CPA will set the rules in the accounting system and check the final results to ensure the statements are accurate.
Getting all the details about a payment - an amount, a description, a date, and some notion of where the money is coming from and where it is going is the bedrock of any business. Thus, when a merchant adds a new payment method like crypto and/or stablecoins, you will want to make sure that you can collect this information and have it inserted into your systems in an automated way. In fact, businesses are required to substantiate (provide documentation about the facts regarding) any transaction on their books.
Loop helps businesses substantiate revenue items by providing copies of receipts (i.e., transaction hashes) with the invoice they paid. We help keep a record of all the transactions that match to the invoice. Without Loop, this would need to be done painstakingly manually. This is extremely cumbersome at scale as it can be difficult to match a specific crypto payment to an exact invoice.
From our early days at Loop, we identified the importance of interoperability. That’s why we built Loop to be flexible enough to fit into any system in a way that is compatible with how this data then flows into other systems like accounting software. When a crypto payment takes place via Loop, information about the amount, date, from wallet address, and to wallet address, as well as information about what is being purchased, is posted to billing systems so that these systems all stay in sync.
Hopefully, it will become clear that the bedrock of accounting requirements is recording a sale, and all the other requirements stem from here. That is why, when you are considering how you will get paid for an item, it is critical to figure out how this payment method will flow into your record-keeping.
The amount recorded is the amount at the time of payment. If you're using a system like Loop, we will do a conversion from the fiat amount to the crypto amount at the immediate time of payment, so these amounts will always be equal. Thus, recording the revenue from the sale is easy - it’s simply the fiat-denominated amount. However, if you decide to sell an item and price it in a token, then you’ll end up needing to record the value of the token at the time of the sale. Luckily, Loop will provide you with the exact time of the payment, which you can use to look up the fiat amount.
2) The accounting rules around buying, holding, and selling crypto
Under current US GAAP (Generally Accepted Accounting Principles) rules, digital assets must be measured at their fair market value each reporting period and recorded directly in net income. This means that the assets will be valued at their current price as of the reporting date. This recently replaced the previous treatment as indefinite-lived intangible assets subject to impairment testing on December 15, 2024.
What does this mean in practice? In practice, this means that all fair value fluctuations (both gains and losses) now flow directly into net income each reporting period. For example, if you hold Bitcoin on your balance sheet and the price of Bitcoin increases in March, then your income statement would reflect this as a net positive (something that increases net income). Most companies handle this by having an account within the income statement called “Gain/Loss on Crypto Fair Value Adjustment.” Assuming you are closing your books each month, this value will bounce up and down if you are holding assets like Bitcoin and ETH that regularly move up and down.
Now that firms need to track the price of the crypto assets they hold with this fair value adjustment, figuring out which price to use is the next big question. In another post on our blog by Mackenzie, we dive into this topic in even more detail. At a high level though, the standard practice is to source the price from the market with the highest volume, called the “principal market.” In the world of crypto today, that is likely to be from large exchanges like Coinbase, Binance, OKX, Kraken, and others. For less liquid native tokens, the principal market may change if these assets are only available on smaller exchanges. This may sound complicated, but in practice, there are a range of great tools (like subledgers and payment gateways like Loop Crypto) that can capture pricing data for you at the time of the transaction.
Any complexity around tracking prices is dramatically reduced when we look at stablecoins, though. By definition, their price is stable, and in most cases, pegged to 1 US dollar. For mainstream, high-volume, stablecoins like USDC and USDT, we tend to see accountants assume the fair market value to always be $1. If you are working with stablecoin assets that have limited volume and liquidity, you may want to challenge this assumption and track stablecoin prices more closely. For most companies that are transacting in USDC and USDT, tracking fair market value is straightforward. If you primarily hold USDC and USDT on your balance sheet, your gain or loss with the Crypto Fair Value Adjustment is likely to be minimal each month.
3) Operationalizing crypto accounting practices
Now that we have been deep in the weeds of accounting practices and fair value practices around tracking crypto assets, we need to re-emerge and talk about operationalizing all this. If you are a business accepting crypto and stablecoins, what does this mean? What tools and services do you need to handle accounting for crypto?
As we detailed in the section above, tracking the fair value of the crypto you hold is one of the primary tasks of crypto accounting. If you are only dealing with stablecoins like USDC and USDT, that process is relatively straightforward since in most scenarios, you can assume the fair market value is fixed at a dollar. It is really only when you start to accept and hold other crypto assets that tracking pricing becomes a bit more critical. A payment processor, like Loop Crypto, helps ensure you capture the US-denominated value of the crypto you receive at the time of the sale.
Let’s take the example of selling a Software-as-a-Service (SaaS) product where you are billing a customer $100 every month for access to your software. Assume the customer pays in ARB (Arbitrum’s native token). When using Loop, $100 worth of ARB is pulled from the customer’s wallet each month. Depending on the price of ARB at the time the payment is due, Loop may pull 150 ARB or 200 ARB. The power of using a payment processor like Loop is that it automatically records the US dollar value of that ARB you received at the payment due date. This means you have a starting point for tracking the value of that digital asset.
To extend the example, once the ARB is on your balance sheet, you now need to track the fair value of that asset as it adjusts month to month. This is where tools known as crypto subledgers come into play. These tools have a variety of functionality, but one core component is that they enable companies to track their crypto balances and values over time. Rather than needing to manually look up pricing data each month, subledgers automatically provide detailed reporting and tracking on this. When a crypto asset is eventually sold, they also help to track which methodology is used to determine which asset is sold (first-in first out (FIFO), last-in first out (LIFO), etc.). Again, all of this is significantly easier to track when you are only dealing in stablecoins, but subledgers do become critical pieces of software, particularly as companies scale their on-chain activities and participate in a range of activities such as staking, trading, and bridging.
To go deeper on how to use a subledger, we suggest checking out this post from The Accountant Quits. The team at Hash Basis also has a great article on how to choose a subledger. There is a range of subledger solutions in the market. To get you started on your research, here are a few subledger solutions to consider:
In addition to adding software for accepting payments and then tracking your crypto holdings, it can also be helpful to add crypto-native accounting support. By this, we mean hiring an accountant or a firm with specialized expertise in cryptocurrency accounting. The great news is that a crop of new firms have been founded in the last 3 years dedicated to serving businesses operating in the web3 ecosystem. There are a lot of factors that go into selecting the right crypto support for your company and determining if it’s best to bring accounting talent in-house or hire an external agency.
Depending on the stage and size of your company, it can often be beneficial to hire an outside firm or accountant. Accounting for digital assets is an ever-evolving field, so you want someone who is staying abreast of current trends and is able to pull in learnings from a variety of experiences with different chains, tokens, and jurisdictions. If you are looking for external accounting support related to crypto accounting and building your crypto accounting infrastructure, we have a few accountants in our network. These firms include:
For larger companies, you can consider bigger accounting firms like Kruze Consulting, Eisner Amper, Rivet, Aprio, Propeller, and many others. This is a good list with additional firms to consider.
Conclusion
Throughout this article, we have explored the implications of accepting crypto and stablecoin payments for your books. We laid the groundwork for cryptocurrency accounting by first starting with an understanding of what happens at the point of sale and how a sale needs to be recorded. From there, we moved into the world of crypto and stablecoin assets, discussing their treatment when it comes to tracking their fair value and the impact on the financial statements. Finally, we brought the discussion together by focusing on what it takes to operationalize crypto accounting within your company, from the software used to the accountant support required. While crypto accounting remains an ever-evolving topic, clear preparation and support from experts can help you easily set up the crypto accounting infrastructure you need to run your business and unlock the growth potential from accepting crypto and stablecoins as payment.
FAQs
What is cryptocurrency accounting?
Cryptocurrency accounting involves recording, classifying, and summarizing financial transactions related to digital currencies like Bitcoin and Ethereum, ensuring they are accurately reflected in financial statements. This process requires specialized methods due to the unique characteristics of cryptocurrencies. Organizations like GAAP and FASB help to set the standards that accountants use to treat crypto assets when tracking transactions in a ledger and preparing financial statements.
What are stablecoins?
Stablecoins are a tokenized representation of an on or off-chain asset (or assets) that are designed to maintain a consistent value. The most widely circulated stablecoins are fiat-backed stablecoins. These stablecoins are typically tied to the value of the US dollar. USDC and USDT are popular examples of fiat-backed stablecoins where the token is a representation of a physical dollar that sits in a bank account and can be redeemed one-to-one. In addition to fiat-backed stablecoins, there are also stablecoins backed by digital assets. DAI is an example of a stablecoin that is backed by a combination of on-chain assets, like Bitcoin and Ether, and other stablecoins. Finally, there is also a broad range of algorithmic stablecoins that are not necessarily backed by underlying collateral but instead utilize a minting and burning mechanism tied to an underlying function.
What is a payment processor?
A payment processor is a company or service that facilitates electronic transactions by securely transmitting transaction details between customers and businesses. It handles authorization, authentication, encryption, and settlement of funds, ensuring that payments are processed efficiently and securely. Payment processors support various payment methods, including credit cards, debit cards, and cryptocurrencies, enabling businesses to accept multiple forms of payment from customers worldwide.
When looking at crypto, there are specific companies like Loop Crypto that focus specifically on crypto payment processing. To learn more about payment processing in web3, you can check out this article.
What is a subledger?
A crypto subledger is a big database that houses all on-chain activity related to a predefined set of wallet addresses. Accounting functionality is then layered on top of the data to generate reports needed for tax & accounting purposes. Subledgers track all transactions, cost basis, lot detail, wallet addresses, gains and losses (both realized and unrealized), and impairment. There’s also flexibility in the cost basis methodology, so your GAAP books can be under one method (i.e., FIFO) while tax books are under a separate method like Spec ID. Essentially, subledgers contain all the nitty-gritty detail that you don’t necessarily want to clutter your main ERP system with (although you can sync in transactions if you choose). Most subledgers will integrate with common ERP systems like QuickBooks, Xero, and NetSuite.
What is a billing management system?
A billing management system is software designed to handle the workflows that come before and after the actual payment. While the billing system simplifies and organizes the workflow, other components like payment processors and payment gateways are involved in executing the actual payment transaction. Together, these systems form a seamless solution to manage and facilitate the entire payment process.
