This article is relevant if you are transacting with cryptocurrencies and you are seeking to understand how to account for gains and losses.

Background

It’s now the end of 2021 and our firm was well ahead of its time. In 2013, I conceived, designed, built, and deployed a full Bitcoin accounting platform under the premise that Bitcoin would become a global electronic payment method. You can see the offering under the Bitcoin Transaction Coordinator or BTC4ERP. Still unfolding, the Bitcoin community is working to build a highly scalable layer 2 Lightning Network which may indeed fulfill the promise of a low-cost global payment method for transacting any business.

However, standing back, due to my background as a Certified Public Accountant coupled to my understanding of the fundamentals of Blockchain technology, and a deep understanding of the NetSuite platform architecture, I surmised that we would need a methodology and practice to produce the proper accounting for Bitcoin transactions.

The Crypto market evolves in adoption waves — and each adoption wave brings in new entrants seeking to get in front of the challenge of proper accounting. I watched others in the market think about Bitcoin as a commodity something akin to inventory. While understandable, I shook my head and suggested that this framing of the challenge actually blinded many about the deeper fundamentals of how to account for such instruments. Consider my 2017 article, Contrasting Bitcoin as an Asset versus a Foreign Currency in the NetSuite Accounting System.

Naturally, in a market where immutable, censor-proof, extremely secure digital tokens are traded globally, each having a different value proposition, the idea that more than Bitcoin would be sought, gathered, and traded was inevitable. While Bitcoin’s ambition is to become private money, other tokens have the ambition to power markets and an array of next-generation services.  Similar to the emergence of the internet before crypto, it would be short-sighted to consider this phenomenon a fad. Fundamentally, cryptocurrency token transactions will be issued and traded; accordingly, such transactions are priced relative to fiat (government-issued) currency.  Thus, we must be responsible to account for these transactions.

Conceptualization of Tranches

To help bridge the world of cryptocurrency with other structured financial instruments, we used the idea of tranches to help explain what it may look like to gather many cryptocurrencies that have similar acquisition and price attributes. Consider an organization that earns crypto from offering token trading fees. It may make sense to take all trading fees earned for the day into a single batch and deem this as a tranche. The tranche can be priced using weighted average methods reflecting the real-world value of individual constituent trades. Since the tokens are fungible (as opposed to the new non-fungible tokens [NFT] technologies), gathering them into a tranche is a reasonable practice.

Solving NetSuite Based Crypto Accounting with Tranche Manager

As a NetSuite Systems Integration Practice, we have helped crypto-organizations solve their specific accounting challenges. In 2014, we lead Bitpay’s NetSuite implementation and conceived of a Crypto Tranche Manager to address the concepts noted above. We further assisted emerging businesses in crypto mining, ATMs and exchanges.  We are in this game in a meaningful fashion offering leadership and technology.

Importantly, we treated crypto fundamentally as a currency to take advantage of the built-in capacities in NetSuite — while at the same time, we designed the Crypto Tranche Manager to allow our clients to specifically track token acquisition and disposition which serve for the process of calculating realized gains and losses.

Thus, this article and associated video demonstration illustrate the Tranche Manager concept.  Consider the following capacities:

1. Crypto Definition: fortunately, more recently, NetSuite opened the currency definition beyond fiat currencies. Thus cryptos are defined as custom NetSuite currencies allowing for the tracking of a nearly unlimited number of tokens — when doing so, all the built-in NetSuite currency features naturally enable. Furthermore, since digital currencies often are constituted with uncommon decimal considerations as a supply policy, we can play with our concept of unit-of-measure definitions to produce the precision desired in the accounting system.
2. Crypto Pricing: NetSuite does not have a built-in way to price cryptocurrency. I will publish another article on a separate Crypto Pricing service that tracks and thus feeds NetSuite’s native currency exchange rate system.
3. Crypto Linking to Cash Accounts: each token wallet can be tracked as a NetSuite cash account defined as a specific currency type similar to the way we think about bank accounts. When doing so, we then open up all the possibilities to leverage NetSuite’s built-in reconciliation tools. We can use transfers between crypto and fiat with natural implied exchange rate impacts.
4. Wallet Groups: consider that an organization may have cold, hot, and operating crypto wallets. These wallets can be linked together into groups so that we can treat the accounting for gains and losses as a logical unit; we then can apply first-in-first-out (FIFO) or other cost treatments to token dispositions to determine realized gains and losses.
5. Tranche Definition: modeling the shape of crypto token acquisitions, the tranche is the fundamental record that is priced, formally tracked, and automatically backed by NetSuite ledger accounting. Once a tranche is defined, we can use it in conjunction with our wallet groups to never lose our crypto cost basis. As the tranche is consumed by dispositions (e.g., sales, miner fees, or obligation settlements), we can track the remaining units left (eventually leading to zero as they are fully disposed) with a complete audit trail.
6. FIFO Stacks: now that there has been more formal accounting guidance on how to treat crypto in the accounting world, we can organize our tranches in stacks based on date/time plus wallet groups to automatically propose accounting for realized gains and losses.
7. Realized Gains and Losses: We recommend a practice to recognize gains and losses after crypto balances are reconciled. All dispositions are against available tranches to provide the basis for the accounting treatment. A preview tool is provided to assess gains/losses to be recognized by a batch processor to generate financial transactions. Such transactions can be shaped for approval, giving accountants control they need to run their controllership-based operations.
8. Impairment Accounting: should we assess that there is a permanent reduction in the value of specific tokens, we can produce impairment transactions against tranches.
9. Crypto Mark-to-Market: NetSuite’s currency revaluation tools support mark-to-market reversing journal entry generation to record unrealized gains and losses.
10. Systems Integration: the Tranche Manager can easily be updated with all the possible ways NetSuite offers electronic integration. Consider that we offer our clients license-free tools to Fully Automate Complex NetSuite Data Imports. Thus, we can feed NetSuite from other custom platforms that likely are used in crypto operations.

Click on images to see related concepts.

Watch NetSuite Crypto Tranche Manager in Action (22:40)

I am pleased to recognize our senior consultant, Sean G., for helping conceive and build the Crypto Tranche Manager application. Sean and I go back since the early 1990s when we worked together at Deloitte & Touche building and implementing financial systems for a wide array of clients.

Sean is presenting the following video (22:40).

Build your NetSuite Crypto Accounting with the Tranche Manager

The BTC4ERP Crypto Tranche Manager is a great example of the innovation we produce for clients in my firm. Without a doubt, we hold the most significant leadership accomplishments in the growing world of cryptocurrency and NetSuite adaptation and adoption. Like all the algorithms we produce in our firm, we give these to our clients license-free to enhance the value of our professional services relationship.

If you found this article relevant, feel free to sign up for notifications to new articles as I post them.  If you are ready to process your crypto transactions in NetSuite and you assess the tranche manager would be valuable in your operation, let’s have a conversation.

Marty Zigman

Holding all three official certifications, Marty is regarded as the top NetSuite expert and leads a team of senior professionals at Prolecto Resources, Inc. He is a former Deloitte & Touche CPA and has held CTO roles. For over 30 years, Marty has produced leadership in ERP, CRM and eCommerce business systems. Contact Marty to set up a conversation.

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