Four years ago, JPMorgan Chase CEO Jamie Dimon said he “didn’t give a damn [damn] on bitcoin.” On November 3, 2022, the investment banking and financial services holding company executed its first trade on Polygon and a modified version of Aave.

If you think the embrace of cryptocurrencies by retail investors over the past 10 years has been a whirlwind, wait for the approaching tsunami on the horizon: corporate and institutional adoption of digital assets.

Pat White is the co-founder and CEO of bit wave, a software platform that provides cryptocurrency accounting, tax tracking, bookkeeping, decentralized finance ROI tracking, and cryptocurrency AR/AP services for enterprises. This piece is part of CoinDesk fiscal week.

But just as huge tailwinds have gotten us to this point, a balanced mix of regulatory, tax, and compliance headwinds keeps many businesses at bay.

We analyze the state of enterprise cryptocurrency adoption and explore three common tax and compliance challenges new adopters of enterprise blockchains face.

Progress is incremental until it is

In 20 years, looking back, the end of 2022 will become the most crucial period for the enterprise adoption of digital assets.

First, Ethereum’s shift from proof-of-work to proof-of-stake has made the network less energy intensive and, therefore, more conducive to the corporate environment and social governance (ESG) goals. Then, in a series of events, the Financial Accounting Standards Board (FASB) proposed accounting rules that would reduce the financial stigma associated with companies holding cryptocurrencies, which were promptly followed up with preliminary tax guidance from the Internal Revenue Service .

Read more: How to benefit from the collection of tax losses in cryptocurrencies | Opinion

For CFOs of publicly traded companies or others who need to consider the financial, product-level, and board-level impacts of adopting digital assets, these changes alleviate the blood-red hole in their profit and loss statements ( P&L), further the ESG objectives of the board of directors and allow the product team to finally benefit from this transformative technology.

If anything, it’s already happening. Organizations such as BNY Mellon, Nike, Roofstock, Gucci, Chipotle and Telefónica use digital assets to:

  • Increase brand recognition and customer loyalty, and reach tech-savvy demographics
  • Improve internal business operations with practical blockchain use cases
  • Accept or make payments
  • Access alternative investments not available through centralized finance (CeFi)

In the coming years we will see blockchain applied to supply chain management, finance (asset tokenization) and energy (carbon tracking/credits). Despite these advances, organizations will still face common tax and compliance challenges, regardless of where they are on the digital asset maturity curve, including:

  • Get transaction data
  • Understanding data for accounting and tax purposes
  • Keeping track of holdings, which is more complex than organizations realize

The tax and compliance challenges that every new user faces

The importance of data access cannot be underestimated. After all, it’s hard to account for transaction activity without hard data. And while much of the accounting data needed for taxation and compliance is on-chain, that doesn’t mean it’s easy to work with. Of course, this ignores the gigabytes of off-chain data sitting on exchanges, custodians, and internal databases. Let’s just say it takes a lot of data to get a complete picture of an organization’s finances, and it doesn’t organize itself.

This brings us to the second area many organizations struggle with: understanding data.

One of the most significant problems in cryptocurrency accounting is network data error. Many people assume that blockchain is an all-seeing and documenting technology, and to some extent it is. But block explorers aren’t bank statements and can only get you so far. Copying and pasting data from Etherscan into a spreadsheet isn’t enough to figure out what’s going on from an accounting and tax standpoint. You need to maintain customer and supplier address lookup tables, internal wallets, and implemented smart contracts.

See also: Why collecting NFT tax losses remains a challenge for investors | Opinion

There are also cases where the collected data is opaque. For example, interacting with a decentralized finance (DeFi) liquidity pool can present a challenge to even the most experienced accountant, if only because no one in the industry can agree on how to treat these transactions.

This brings us to the last challenge: keeping track of holdings.

Many organizations think that you can track digital assets such as forex using average cost basis as the answer. Alas, nothing could be further from the truth. At Bitwave, we like to say that cryptocurrency is an unholy alliance of forex and inventory: it’s like a foreign currency that you have to track at the lot level, or like the inventory you sometimes decide to pay your employees and suppliers with.

That is to say, to complete a picture of your cost basis for tax purposes, you need to track tokens lot by lot. This makes sense because ether (ETH) bought in 2022 definitely has a different value than ETH bought in 2020.

Are you getting a headache reading this? I understand. Fortunately, many software programs can automate these processes for your organization. And while this sort of thing doesn’t apply to everyone, there are a couple of best practices I recommend to help you navigate tax season.

1. Maintain good wallet hygiene.

Good portfolio hygiene is essential as organizations scale because it helps accountants understand transactions from a workflow perspective as they process them. Always maintain transaction-specific portfolios (e.g. investments, DeFi transactions, income, etc.) and use a consistent naming system. For example, if your client is a creator of non-fungible tokens (NFTs), make sure they maintain a separate wallet for primary and secondary royalty payments.

2. Seek help from a degenerate CPA.

In the regular fiat world you just need to find an experienced Certified Public Accountant (CPA). In cryptocurrencies, everyone must be an expert in their field and the industry itself.

Get a CPA who understands the intricacies of accounting and knows the pain of paying 2 ETH in gas fees for a failed transaction during an NFT drop. It’s crucial that your CPA can play both sides, because even though regulators are finally starting to update guidelines for crypto assets, there is a lot of uncertainty.

And on that note, talk to your CPA early and often. We work with many CPAs and I promise they are great people! But that’s not exactly why we recommend it: Digital Asset Accounting isn’t something you can throw over the fence once a month; your CPA will need your help. Trust me – it will save you from headaches and hopefully an audit.

This wave of crypto adoption has created a new wave of tax and compliance challenges, so it’s up to the crypto-natives to help the Fortune 500 bridge the gap towards adoption. Luckily for them, there is a fantastic group of builders laying the foundations for an open, transparent and fair financial system.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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