Cryptocurrency Tracking for Chartered Accountants

Cryptocurrency has transformed the financial world with the global crypto market capitalization exceeding $2.5 trillion in 2024. As cryptocurrencies become more widespread, accountants face new challenges in tracking, reporting, and managing these digital assets. This shift is leading to significant changes in traditional accounting practices.

Tracking cryptocurrency transactions is important for chartered accountants to ensure accurate financial reporting, follow tax regulations, and manage assets effectively. The complexities of digital currencies such as fluctuating values and anonymous transactions, require careful tracking to avoid mistakes and potential legal issues.

This blog will explain why tracking cryptocurrency is important for chartered accountants. It will offer useful tips and guidance to help accountants handle the challenges of working with cryptocurrencies to ensure accurate financial reporting and compliance in this changing digital environment.

Essential Data and Insights for Cryptocurrency Management by Chartered Accountants

In this section, we’ll have a look at some of the important data points that CAs need to file taxes and audit their client's accounts.

Balance and Balance Updates

Accurate balance tracking is crucial for chartered accountants (CAs) to maintain reliable financial statements and reports. This process ensures that financial records reflect accounts' true state to enable precise analysis and reporting. With up-to-date balance information, financial statements may present an accurate picture. This leads to better decision-making and potential compliance issues.

For effective balance tracking, CAs need to monitor several key data points:

• Current Balance: This is the total amount available in an account at any given moment. It provides a snapshot of the account's financial status.
• Balance Updates: Regular updates on changes in the balance are essential. These updates help track any additions or deductions over time.
• Transaction History: Detailed records of all transactions affecting the balance. This includes deposits, withdrawals, and transfers.
• Pending Transactions: Information about transactions that are in progress but still need to be completed or reflected in the current balance.

Example: Tracking Balances on Arbitrum

Consider a Chartered Accountant needing to track the balance of a specific address on the Arbitrum network. The CA needs to capture both the current balance and balance updates and changes.

Bitquery’s API offers a Balances & Balance History API for 40+ blockchains including Arbitrum. These tools allow you to track the current balance and monitor changes over time. Click here to see the query for the Balance update.

From the balance update query, we see:

1. Smart Contract: 0xfb8d9d8199626c29f325e701d56991f8d21087f4

• Claim Symbol: Claim on: claim.early-zerolend.com
• Recorded Sum: 4,059,941
• Transaction Count: 1

2. Smart Contract: 0x69ed211625de72edcceca4c8130cb435357d8a48

• Claim Symbol: Claim on: rewards.pepe-on-base.com
• Recorded Sum: 20,000
• Transaction Count: 1

Analysis of Balance Updates

These examples illustrate how balance updates can reflect significant transactions. By analyzing these updates, CAs can ensure that the data aligns with the expected transactions.

• Verification of Claims: The balance update shows a transaction involving SmartContract 0xfb8d9d8199626c29f325e701d56991f8d21087f4 with a sum of 4,059,941 units. Chartered accountants can verify that this large transaction was processed correctly and is accurately reflected in the financial records.
• Auditing Reward Claims: Another update indicates a transaction with SmartContract 0x69ed211625de72edcceca4c8130cb435357d8a48 linked to a claim of 20,000 units. Accountants auditing this transaction can confirm that the reward was properly claimed and recorded, cross-referencing with other records to ensure accuracy.
• Maintaining Accurate Financial Records: Tracking balance updates such as the recorded sums of 4,059,941 and 20,000 units allows CAs to ensure that all related transactions are accurately reflected in the entity's financial system. This practice helps maintain transparency and provides a clear audit trail for all claims and rewards associated with smart contracts.

Client's Trades and Transactions

Detailed records of clients' trades, transfers, and transactions are crucial for Chartered Accountants (CAs) to ensure accurate and comprehensive accounting. These records provide transparency to verify that financial activities are properly documented and reflect the true state of the client's accounts. 

CAs can use Bitquery to access detailed transaction histories and monitor financial activities efficiently to ensure accurate and comprehensive accounting practices.

Here are a few examples demonstrating how Bitquery’s APIs can assist in this process.

Example 1: Tracking Latest Transactions on Arbitrum

Imagine a chartered accountant managing the accounts of a client who actively trades and transacts on the Arbitrum network. The client needs to ensure that all recent transactions are accurately recorded for financial reporting and compliance purposes.

The CA uses Bitquery’s Latest Transactions API to retrieve the most recent transaction data. Click here for the query.

Here’s a detailed look at the output received:

• Transaction Hash: 0x3ee983bc4b0ce588efae504de08424830aad7d38dc0e2c014522bb0924143b8d
• To Address: 0x00000000000000000000000000000000000a4b05
• Value Transferred: 0.000000000000000000
• Fee Information: Effective Gas Price: 0.000000000100000000, Sender Fee: 0.000000000000000000
• Block Number: 111621768
• Timestamp: 2023-07-15T23:59:59Z
• Gas Used: 0

Findings and Actions:

• Verify Transaction Details: The transaction hash and the "To" address allow me to verify that the transaction was correctly processed and sent to the intended recipient. This ensures that the transaction details are accurate and match the client's records.
• Check Transaction Timing: The timestamp 2023-07-15T23:59:59Z helps me confirm that the transaction occurred within the correct accounting period. Accurate timing is crucial for proper financial record-keeping and ensuring transactions are reported in the appropriate period.
• Assess Transaction Costs: The effective gas price and sender fee data enable me to evaluate whether the transaction costs were reasonable and correctly recorded. This helps ensure that all fees are accurately reflected in the financial records.
• Confirm Gas Usage: The gas used value of 0 suggests no additional processing costs were incurred. This information is used to verify that the transaction aligns with expectations and is recorded correctly in the client's financial system.
• Reconcile Transaction Values: Although the value transferred is 0, it is still important to ensure that no discrepancies exist. Verifying that this matches the expected outcome helps confirm the accuracy of the transaction recording.
• Audit Trail: The block number 111621768 allows me to trace the transaction back to the blockchain, providing a reliable audit trail. This traceability ensures transparency and supports the verification process.

Example 2: Tracking Client-Specific Trades

For Chartered Accountants, accurately monitoring transactions related to their clients' wallets is crucial for financial reporting and compliance.

Bitquery allows CAs to retrieve the latest buy-side and sell-side trades for a specific wallet address on the Ethereum network. you can view the relevant query here.

Here are the trade details of the specific address.

• Block Number: 20557842
• Block Time: 2024-08-18T20:16:23Z
• Transaction From: 0x152a04d9fde2396c01c5f065a00bd5f6edf5c88d
• Transaction To: 0x6f1cdbbb4d53d226cf4b917bf768b94acbab6168
• Transaction Hash: 0x486faf0e8b0d74298e867b933234f71e7aad3e08a20463069d34fca697bb2aa8

Buy-Side Trade:

• Buyer Address: 0x4dd26482738be6c06c31467a19dcda9ad781e8c4
• Seller Address: 0x6f1cdbbb4d53d226cf4b917bf768b94acbab6168
• Currency Bought: Wrapped Ether (WETH)
• Amount Bought: 0.149355364827891648 WETH
• Price: $1738.91 per WETH
• Smart Contract: 0xc02aaa39b223fe8d0a0e5c4f27ead9083c756cc2

Sell-Side Trade:

• Currency Sold: API3 (API3)
• Amount Sold: 259.716274876207960300 API3
• Price: 0.0005750712576602328 WETH per API3
• Smart Contract: 0x0b38210ea11411557c13457d4da7dc6ea731b88a

How This Helps CAs

• Precise Transaction Tracking: CAs can verify the exact block number and timestamp when a transaction occurred, ensuring accurate financial reporting and tax compliance.
• Client Wallet Monitoring: The details of transactions (sender, receiver, and transaction hash) allow CAs to monitor specific client wallet activities, helping to identify and report taxable events.
• Trade Details Verification: Information on the currencies involved, amounts, and prices helps CAs confirm the accuracy of trade transactions which is essential for calculating capital gains or losses.
• Smart Contract Information: Knowing the smart contract addresses associated with trades ensures that the assets are correctly identified which is crucial for reporting purposes.
• Audit Trail: The transaction hash provides a direct link to the blockchain record, enabling CAs to maintain an audit trail for each transaction to increase transparency and reduce the risk of discrepancies.

Example 3: Monitoring All Transfers for a Specific Client Wallet

To effectively manage cryptocurrency transactions for a client, it's crucial to monitor all transfers associated with their wallet address. Bitquery's Transfer API provides detailed tracking capabilities for client-specific addresses. This API allows Chartered Accountants (CAs) to efficiently retrieve and analyze all relevant transfers related to their clients, ensuring comprehensive oversight and accurate reporting.

By applying specific filters, you can retrieve all transfers both sent and received for a given wallet. This ensures that CAs track only the transactions relevant to their client rather than all transactions on the network. Click here to view the query.

Here are the details of the output received for client-specific transfers.

• Block Information:
• Timestamp: 2023-07-19 23:59:59
• Block Height: 30112976
• Sender Details: 0x10ed43c718714eb63d5aa57b78b54704e256024e
• Receiver Details: 0xbb4cdb9cbd36b01bd1cbaebf2de08d9173bc095c
• Currency Details: WBNB (Wrapped Binance Coin)
• Transaction Amount:
• Amount: 0.058691611822031274 WBNB
• Amount in USD: $14.15
• Transaction Hash: 0x0f24a7709f5f0c5136faa3a7a5e4cf89cf1b0fdd2579cdefd4059321db7b410b

External: True

How This Helps CAs:

• Focused Monitoring: Allows CAs to concentrate on transactions involving the client's specific wallet address, eliminating unrelated data and focusing solely on relevant activities.
• Detailed Insights: Provides essential details such as transaction amount, currency used, and the exact USD value, aiding in accurate financial reporting and valuation.
• Traceable Transactions: The transaction hash allows for easy verification and tracing of the transaction on the blockchain, ensuring transparency and accuracy in financial records.
• Comprehensive Reporting: Facilitates detailed reporting by including timestamps, sender and receiver addresses, and transaction amounts which are crucial for compliance and auditing purposes.

Token Holdings and Valuation

Token holders are wallets that possess a specific token. For Chartered Accountants (CAs), tracking these holders is important for accurate asset management and valuation. It helps in understanding the distribution of tokens, assessing their value, and ensuring compliance with regulations.

Example: Evaluating Token Holdings

Consider a CA tasked with assessing the token holdings for a client's portfolio. The client needs to understand the distribution and valuation of their tokens for financial reporting.

To get this information, the CA uses the bitquery token Holders API to gather details about the token's holders. Click here for the query.

Outcome:

• Token Holder Address: 0xd5a9504427fd88088eb0f708152679958ec6b339
• Token Holder Address: 0x0442912dc7d9afa1561c0d8322573314cbe9414d

How This Helps:

• Distribution Insight: The CA can identify key addresses holding significant amounts of ChainLink Token. Understanding token distribution helps in analyzing the concentration of holdings and potential market impact.
• Valuation Calculation: With the amount of LINK held by each address, the CA can calculate the total value of these tokens based on current market prices. This helps in assessing the financial status of the client’s portfolio.
• Reporting Accuracy: Detailed data on token holdings supports accurate financial reporting. The CA can ensure that the token holdings are correctly reflected in the client's financial statements.
• Regulatory Compliance: Accurate records of token holdings help in meeting compliance requirements and avoiding any potential regulatory issues related to asset declarations.

Complex DeFi and NFT Activity

Monitoring DeFi transactions and NFT activities is crucial for Chartered Accountants (CAs) to ensure accurate asset movement and valuation reporting. The decentralized nature of DeFi protocols and the unique characteristics of NFTs make it essential for CAs to have a clear view of all financial activities related to these assets. Detailed tracking helps in:

• Accurate Valuation: Understanding how assets move and change in value ensures precise reporting. This is essential for financial statements and valuation reports.
• Asset Tracking: Monitoring transactions and trades provides insight into the historical and current status of assets which is vital for accurate balance reporting and compliance.
• Fraud Prevention: Detecting irregularities in transaction patterns helps in identifying potential fraud or discrepancies.
• Regulatory Compliance: Ensures that all DeFi and NFT activities are documented and compliant with regulatory requirements.

Example: Tracking the Latest NFT Trades

Consider a Chartered Accountant overseeing a client’s investments in NFTs. The client is involved in trading various NFTs on the Solana network. To accurately assess the value of these assets and ensure proper reporting, the CA needs up-to-date information on recent NFT trades. 

Using Bitquery’s Solana NFT API, the CA can obtain detailed information about the client's NFT trades. Click here for the query.

Output:

• Trade Amount: 1 NFT
• Currency: NUD
• Trade Side: Sold for 0.0682 SOL
• Dex Information: Tensorswap (Tensor Protocol)

How This Data Helps:

• Verify Trade Details: The trade amount and currency help ensure that all NFT trades are accurately recorded in financial statements.
• Assess Trade Value: The amount received in SOL confirms that the trade value aligns with market expectations and financial records.
• Evaluate Protocol Usage: Knowing the DEX and protocol used provides insight into the trade context and any associated fees.
• Update Financial Records: Accurate trade details ensure that the client’s financial records reflect the latest asset valuations.
• Track Performance: Historical trade data aids in evaluating NFT performance, which is crucial for accurate profit and loss calculations.

Tracking Historical Balances and PnL Information

CAs managing clients' DeFi assets and NFTs must track historical balances and profit and loss (PnL) information. This process is crucial for accurate asset movement reporting and valuation. Understanding past performance and current holdings ensures that financial statements are comprehensive to enable informed decision-making.

Bitquery’s Portfolio 360 offers an extensive solution for this need. It provides detailed insights into blockchain activities including historical balances, PnL information, and a holistic view of DeFi positions across multiple blockchains. 

This tool helps CAs effectively manage DeFi ventures, monitor asset performance, and ensure accurate financial reporting. For a comprehensive solution to managing and analyzing blockchain portfolios including DeFi and NFT activities, Portfolio 360 is an invaluable resource.

How can forensic accountants trace crypto?

Forensic accountants tasked with tracing cryptocurrency transactions face a unique set of challenges. The complexity of blockchain technology and the techniques used to obscure transaction details make it difficult to track assets accurately.

Challenges in Tracing Cryptocurrency for Forensic Accountants

Tracing cryptocurrency presents several challenges that forensic accountants must overcome. The key obstacles include:

• Obfuscation Techniques: Cryptocurrency users often employ methods like mixing, tumbling, and coin swapping to obscure the origin and destination of funds, making it difficult to trace transactions.
• Anonymity & Pseudonymity: Many cryptocurrencies offer a high degree of anonymity, with users identified only by alphanumeric addresses. This pseudonymity complicates the process of linking transactions to real-world identities.
• Cross-Chain Complexity: With the increasing use of multiple blockchains, tracking transactions across different chains becomes more complex. Funds can be moved through decentralized exchanges (DEXs), bridges, and mixers, further complicating the traceability.

Tracing Cryptocurrency with MoneyFlow

Forensic accountants can significantly enhance their ability to trace cryptocurrency transactions using tools like MoneyFlow. This solution is tailored to address the challenges of crypto investigations to provide comprehensive tools to track and analyze the movement of digital assets across blockchains.

• Cross-Chain Tracking: MoneyFlow allows accountants to monitor transactions across different blockchains, overcoming the complexity of cross-chain activities. It supports major bridges, ensuring detailed tracking of funds as they move between networks.
• Automated Clustering: By grouping related transactions automatically, MoneyFlow streamlines the analysis process. This feature saves time, reduces errors, and enhances the accuracy of tracing efforts by clustering transactions that are part of the same flow.
• Detailed Address Monitoring: Forensic accountants can track specific addresses to build a complete transaction history. This tool enables the identification of suspicious activities or patterns that may indicate fraudulent behavior.
• Visualization Tools: MoneyFlow offers intuitive graphical representations of transaction flows, making it easier for forensic accountants to visualize and explain the movement of funds. These tools also allow for customization, adding notes and tags for detailed analysis.
• Tracing Commingled Funds: The ability to trace and separate commingled funds is crucial for clear accounting. MoneyFlow supports various accounting techniques like FIFO, LIFO, and PIFO to ensure accurate tracking and reporting of mixed assets.

Country-Specific Compliance in Cryptocurrency Operations

Understanding the regulatory environment for cryptocurrency is crucial for ensuring compliance and mitigating risks in various jurisdictions. Regulations can differ significantly from one country to another, impacting how cryptocurrencies are used, traded, and reported. Here’s an overview of the current regulatory landscapes in key regions:

India: Cryptocurrency regulation is integrated into existing financial laws. The Prevention of Money Laundering Act (PMLA) now includes Virtual Digital Assets (VDAs), requiring crypto businesses to obtain licenses from the Financial Intelligence Unit (FIU) and adhere to stringent AML and KYC requirements. This framework mandates detailed identity verification and transaction monitoring to prevent illicit activities.

United States: In the U.S., cryptocurrency regulations involve multiple agencies. The SEC oversees securities aspects, the CFTC regulates commodities trading, and FinCEN enforces anti-money laundering rules. Crypto businesses must register as money services businesses and follow KYC procedures to comply with these regulations.

Europe: The European Union has introduced the Markets in Crypto-Assets (MiCA) regulation, providing a comprehensive framework for crypto asset service providers. MiCA aims to harmonize regulations across member states, addressing issues like consumer protection, market integrity, and financial stability. Individual countries also have their regulations which may require additional compliance measures.

Cayman Islands: The Cayman Islands is attractive for cryptocurrency operations due to its tax-free environment, with no income, capital gains, or sales taxes. However, crypto businesses must comply with anti-money laundering (AML) and counter-terrorist financing (CFT) regulations including obtaining licenses from the Cayman Islands Monetary Authority (CIMA).

Conclusion

In conclusion, the growth of cryptocurrency presents new challenges for chartered accountants. The complexity of digital assets requires careful tracking to ensure accurate financial reports and compliance with tax laws. Understanding cryptocurrency and using appropriate tools can help accountants manage these challenges effectively.

Adapting to the digital world is crucial for accountants to remain relevant and successful. Accurate tracking and management of cryptocurrency transactions are essential for maintaining financial integrity and staying compliant with legal requirements in the evolving financial landscape.

Written By Aakash