Buy Bitcoins at Bitcoin ATMs

How Crypto ATM Operators Ensure Compliance – Accounting

In the United States, the IRS views cryptocurrency as a property (for businesses) [1]. This means all cryptocurrency related transactions must be tracked and the capital gain/loss accounted for. To ensure compliance and to prepare for any potential audits, transaction records should be kept for 7 years as recommended by the IRS, this means safeguarding 7 years worth of cryptocurrency transaction records for operators [2].

Below are some common taxable events operators may encounter:

  • Purchase of goods and services using cryptocurrency
  • Disposition of cryptocurrency in exchange for fiat
  • Exchanges of cryptocurrency to another
  • Airdrops
  • Mining

Operator Challenges in Cryptocurrency Accounting

Operators need to consolidate their transaction data from all their data points for accurate bookkeeping and reporting. This can be a challenge due to several reasons.

A cryptocurrency ATM operator will most likely use multiple sources during the operation. Often a combination of secure hardware wallets, multisig software wallets, exchanges, custodian hot wallets, nodes and ATM Kiosks. The inflows and outflows of these wallets need to be tracked and auditable not only for internal efficiency and accountability but as well to ensure compliance during audits or when reporting taxes. Most of the said data points will offer API links or CSV exports.

The following are data points in which operators consolidate transactions from:

  • Hot/Cold/Warm Custodian wallets
  • Exchanges
  • ATM Kiosks

Most operators use a custodian hot wallet such as BitGo or CryptX during their operation. An ATM purchase request is forwarded to the providers exchange account. The exchange purchases the required cryptocurrencies and passes them to the client through a hot wallet. Hence wallets are mostly seen as a routing point for transactions and can be identified as the asset hub.

Transaction CSVs are the most common sources of transaction data that operators use for bookkeeping. An industry problem operators face when working with cryptocurrency transaction CSVs is a lack of industry standardization. All Exchanges have different API responses and CSV formats.

Regulation surrounding cryptocurrency related business activities can vary at multiple levels of government depending on the country. In the United States, an MSB license is a requirement for crypto ATM operators to have; however a state may require an operator to obtain a license to conduct business in its jurisdiction. An example of this would be operators in the state of New York requiring a BitLicense to do business. The concept is similar in Canada. There is federal licensing (MSB) and meeting compliance of each province.

Clear regulations and guidelines are a very positive factor enabling further growth of the cryptocurrency ATM industry. The United States and Canada both have clear regulatory guidelines surrounding cryptocurrency businesses and how they can ensure compliance. With the USA and Canada leading the world in terms of number of installed cryptocurrency ATM machines, there is no coincidence that clear regulation is a factoring enabler of the booming industry.

Transaction Reporting

Operators need to be able to generate transaction reports from all data sources for accurate audits. These reports can be in the form of a CSV or PDF file. Furthermore, operators will need to disclose how cost and sales values for each transaction is calculated. Each report should showcase important details like transaction hashes, purchase cost, sale price, operator fees, machine ids etc. Let’s take an example below of a typical process an operator will go through when fulfilling the sale of cryptocurrency to a customer using a BTM.

Operator receives sale pending request from BTM and derives liquidity from an exchange:

Step one:

Exchange: BTC purchased with fiat (non-taxable event)
Exchange: BTC purchased with crypto (taxable event)
Fee payments are taxable

Step two:

BTC transferred to intermediary wallet (non-taxable event, internal transfer)
Fee payments are taxable

Step three:

BTC transferred to customer’s wallet from intermediary wallet (taxable event, disposition)

In a real life example, operator A derives liquidity from Gemini to then fill the multisig BitGo wallet which in turn is the source for fulfilling orders from BTMs. For tax purposes, the acquisition of cryptocurrency through liquidity solutions like exchanges and dispositions at the BTM need to be tracked and linked together despite the intermediary transfer in between. However, the IRS required operators to report both acquisitions and dispositions [3].

International Financial Reporting Standards (IFRS) must be followed, this would include measuring assets at fair market value. An example of this would be calculating the cost of a Bitcoin purchased from one exchange and calculating the cost of a Bitcoin disposed via a wallet. The cost of the Bitcoin purchased in the exchange will simply derive from the exchange’s purchase price at the timestamp of the trade. Calculating the cost of a Bitcoin disposed (in the tax context of disposition) via a wallet is a much less simple process. A market aggregated index must be used to determine the fair market value of that Bitcoin disposition to garner the most accurate cost. The timestamp of the disposition would be verifiable via the blockchain.

Accurate cost calculation is imperative for cryptocurrency ATM operators due to the sheer practice of treating digital currencies as inventory. The inventory cost when sold would reflect on the Cost of Goods Sold (COGS) calculation which is then used to determine the profitability of sales. In the jurisdictions where cryptocurrency dispositions are subject to capital gains tax, the taxes owed on the appreciated gains made is a further expense on the profitability of sales. Of course the inverse can occur as well, capital losses declared by an operator would then be used as a deductible in the next corporate tax filing. Cryptocurrency operators would typically follow the cost basis (FIFO/LIFO) or weighted average cost (WAC) accounting methods for calculating capital gain and loss of each cryptocurrency disposition.

Accounting Solutions for Operators

Operators will need to consolidate and normalize all transaction data, run calculations in one place for a full auditable report. This can be done through data synchronization of multiple sources. There is a significant amount of manual accounting and reconciliation involved in verifying inflows and outflows of cryptocurrencies. At scale, a manual focused process behind accounting and reconciliation is costly and time consuming. There are companies which provided solutions dedicated for this task. For example, Cryptoworth builds software products such as Cryptoworth CAP that solves the problem operators face. They designed the software to capture all data points, track the asset flows end-to-end, run calculations such as Cost basis, WAC on large data sets with a very high accuracy. This sophisticated automation helps to reduce the reporting and accounting burden on the operators allowing them to focus on business growth rather than bookkeeping.

Cryptoworth CAP for Operators

Currently Cryptoworth’s solution has native CSV support for Genesis ATM, General Bytes ATM and Bitaccess. Operators using the supported BTM machine software integrations will be able to log into their BTM back office portal to export CSV reports to then upload these CSVs into Cryptoworth CAP for the purpose of transaction consolidation, digital portfolio management and tax calculations. With an operator’s transaction data uploaded onto Cryptoworth CAP, the profits, losses, realized and unrealized gains/losses will all be displayed. The asset flow from exchange to wallet to ATM can be tracked flawlessly and advanced reconciliations can be done automatically through data manipulation features. Cryptoworth produces auditable reports on calculations which further helps the back office to validate calculated values.

Links in the text:

  1. “Frequently Asked Questions on Virtual Currency Transactions” https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions
  2. “How long should I keep records?” https://www.irs.gov/businesses/small-businesses-self-employed/how-long-should-i-keep-records
  3. “Frequently Asked Questions on Virtual Currency Transactions” https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions

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