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As crypto matures and continues on its inevitable path of widespread adoption, proper accounting for crypto as an asset class and income source becomes more important.
The core of cryptocurrencies is not designed to fit into the traditional financial system. After all, there are some of its main advantages over fiat and banking systems. For crypto natives, trying to fit the square peg of crypto into the round hole of traditional finance is often done reluctantly at tax time or, in the case of crypto-based businesses, at monthly closing time. In the U.S. and other regulated economies, these practices are a necessary evil to maintain crypto. However, accounting for cryptois neither difficult nor harmful to the entire crypto ecosystem
But let’s back up for a moment.
The Paradox Equation
As companies and funds continue to pushbitcoin spot ETFsand other financial instruments, including cryptocurrencies that work in a more traditional financial ecosystemand As we continue to promote other financial instruments, including cryptocurrencies that function in a more traditional financial ecosystem, we are left with a somewhat paradoxical equation.
The mass adoption of crypto, especially by hedge funds, institutional investors, and other large organizations, is a positive for the sector. It can spur innovation and ensure the continued, permanent adoption of digital currencies. However, the paradox here is that this adoption, which is the ultimate goal of most in the crypto space, will create a symbiotic relationship between crypto and financial regulations and processes.
We have seen the crash of Celsius, Three Arrows Capital, and many others. All of this is reminiscent of the crashes and consequences seen in traditional financial markets under greed and mismanagement, among many other nefarious behaviors. Historically, these consequences have all worked to create a more stable financial ecosystem for consumers and investors alike, although they have resulted in greater oversight over the space of more regulation.
In short, we are left with the paradox of the fusion of decentralized digital currencies and centralized regulation. So how can this paradoxical situation be resolved to achieve a beneficial and foundational outcome for the growth of crypto and to maintain the benefits of cryptocurrencies at their core?
{New regulations are one piece of the puzzle, but that is yet to come. There have been many rumors and discussions about new regulations in the US-based or global crypto space, but so far there is nothing substantial{to date}. Another 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 the two industries so that both can lift the other up.
This is what Ledgible is solving.
Building a sturdy bridge between crypto and traditional finance depends on being able to match crypto with thetraditional tax and accounting world. The unglamorous foundations of traditional finance arecertainlyHowever, if crypto can be easily adapted to the world of tax and accounting, the above paradoxical equation can be solved.
When it comes to cryptography, it is more important to aggregate, normalize, and Ledgibletraditional cryptographic datathan to try to reinvent the wheel. Ledgiblefor traditional finance and accounting allows CFOs, accountants, and tax professionals to properly account for crypto in their workflow. Just like traditional assets like stocks and bonds.
This also means that what makes crypto crypto – the decentralized nature, 24/7 trading, staking, defi, protocols, etc. – can continue to make itwell,Crypto is crypto. Rather than integrating crypto into traditional assets like stocks and bonds, the financial ecosystem can keep traditional financial instruments on one vertical axis and crypto assets on their own vertical axis, easily bridged by solutions like Ledgible.
In short, allowing cryptocurrencies to inevitably be adopted in the process of becoming mainstream does not take away the uniqueness of this asset class. Rather, with the right tax and accounting tools, the gap between crypto and financial regulation and accounting can be quietly bridged and crypto can continue to do what it does best.
In short, bridging the gap between crypto and traditional finance is not only the best path, it is the path that Ledgible professionals are leading the way on at a high level. So what specific challenges does the team solve?
resolving tax {128} 67} accounting issues
70} In IRS Notice 2014-21, 2014-16 I.R.B. 938provides basic guidance on digital currency. outlines basic guidance regarding digital currency. Under federal income tax law, digital currency is treated as property. From there, current tax laws apply – but what does this really mean?
As called for before, bridging the gap between crypto and traditional finance means properly connecting crypto to bulky regulations like those from the IRS. Crypto transactions are increasingly being scrutinized by the IRS, and with no definitive, custom-made guidance on crypto yet from the IRS or other governing bodies, there is still a lot of room for interpretation for digital assets. As discussed in another articleon crypto tax guidance,
“Under U.S. tax law, U.S. citizens are required to pay taxes on income from all sources, and much of the tax code addresses the taxability of different types of income, or how income is earned. For example, wages are subject to Social Security taxes, but interest is not. Taxes on capital gains are usually lower than taxes on ordinary income. In some cases, the tax treatment of income depends on the legal structure of the business as well as the number of hours the taxpayer actively participated in the activity.”
If your eyes glaze over, hold still. Financial regulation and tax laws are no fun. Especially in the crypto space, Ledgible has incorporated its tax laws and quietly and automatically applies them to crypto holdings and transactions… That’s why wemake it so; Ledgible is… I hope you get the gist.
The Ledgible platform takes all that work out of solving crypto’s tax and accounting challenges. Think of the platform as a middleman, so to speak, taking in non-standardized crypto data and spitting out standardized transaction and accounting information.
But by identifying and properly solving problems, we can make crypto tax and accounting easy and even beneficial to users.
The Benefits of Proper Accounting for Crypto
At the beginning of this article, we called out that properly accounting for crypto is “neither difficult nor harmful to the entire crypto ecosystem.” Staying true to that statement, we will discuss the potential benefits.
Crypto winter is a great time to discuss proper crypto accounting. This is because during recessions and periods of heavy selling, there is a great opportunity to utilize crypto to reduce the overall tax burden. Not only are crypto losses fully deductible, but for the time being, strategies like tax loss harvesting can be used to maximize profits.
Simply put, the benefits of proper crypto accounting mean that crypto traders can follow the rules, reduce audit risk, and even leverage existing rules for profit. Not only that, but as the gap between crypto and traditional finance is bridged, the barriers to entry into the crypto ecosystem will be lowered, interest will grow, and great success can be achieved in this area.
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