Building a Financial Foundation for Crypto Startups: Key Takeaways from TNF Takes
The crypto industry is brimming with innovation, but for startups operating in this space, proper financial accounting and management is critical, yet often overlooked. In this episode of TNF Takes, Noah Buxton and Nick Ward, CPA, of The Network Firm dive into the foundational principles of accounting and financial reporting for crypto startups. Whether you’re a technical founder with minimal accounting knowledge or a growing crypto business seeking clarity, this article and discussion highlights multiple must-know topics.
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Focus on Building,
But Don´t Neglect Your Accounting and Financial Reporting
Many founders prioritize building products and securing funding(as they should!) but often pay little to no attention to accounting and financial reporting. However, this approach can lead to significant problems, especially when:
Tax Time Hits
Without organized books, founders face stress, last-minute scrambling, and higher costs for accounting cleanup projects needed to to complete their tax returns.
Fundraising or Exits Require Accurate Financials:
Investors and acquirers expect reliable financial statements. A lack of proper bookkeeping can delays a deal, Kills deals or expose unforeseen issues. In later rounds, investors typically include audit requirements, so building the accounting function early can support growth initiatives.
Regulatory Compliance:
With tax authorities closely monitoring crypto businesses, failure to maintain accurate records increases risk of tax audit, back taxes, penalties and interest.
Founders can still focus on their priorities while putting solid accounting and financial reporting processes in place. A proactive approach, and relying on outsourced professionals, not only avoids these pitfalls but also helps businesses scale effectively.
The Four Key Buckets of Financial Operations
Noah Buxton and Nick Ward identify four core components of financial management for startups:
Bookkeeping:
The foundation of all accounting processes, tracking every transaction is more complex subject to nuanced accounting rules under GAAP, and requires specialized tools and knowledge.Reporting:
Turning raw bookkeeping data into actionable insights through financial statements. This step involves reconciling crypto activities with traditional frameworks like GAAP or IFRS.Compliance:
Ensuring adherence to tax laws and regulatory requirements. Crypto presents unique tax implications—capital gain and/or realized gain and loss recognition, inventory managements on every transaction, fair value reporting— all requiring extra diligence.Planning:
Forward-looking financial strategies, including budgeting, cost control, and forecasting, are critical for sustainable growth.
Alpha Tips for Technical Founders
For founders not steeped in accounting practices, the following tips provide a starting point:
Leverage Automation Early:
Tools like QuickBooks Online for traditional finance and crypto accounting platforms for wallet tracking can simplify processes. However, in certain cases, relying on a service provider like TNF with specialized knowledge and tools can enable you to avoid the need for costly software early in the business’ life.Practice Strict Wallet Hygiene:
Use dedicated wallets for specific purposes (e.g., payroll, expenses, revenue). Tagging transactions by wallet addresses reduces manual effort and ensures clarity in financial reporting.Document Everything:
Even if you're not using sophisticated tools, keeping detailed spreadsheets and wallet histories creates a paper trail that aids in audits and cleanup projects.Don’t Skimp on Basic Support:
Hiring a part-time bookkeeper for $1,500–$2,500/month can save significant costs(especially the cost of cleanup projects during tax time or year-end). Early-stage businesses often benefit from outsourced accounting firms that scale with their growth.
Business leaders hope to grow a business large enough to demand an in-house accounting department. However, the cost to staff even a small accounting department quickly outpaces the cost of outside support. Look for a provider that can layer in “CFO Advisory” services to ensure you get the benefit of basic bookkeeping, but also the insights of experienced crypto accounting and finance pros.
Tax Compliance Essentials for Crypto Startups
Crypto businesses face unique tax challenges that founders must address proactively:
Income and Capital Gains
Crypto received as revenue is taxable. Additionally, each time a crypto asset is sold or converted, it triggers a recognition of gains or loss.Entity Structure Matters
Whether your business is taxed as a partnership, LLC, or C-corp impacts how crypto activities are reported and taxed. For LLC’s, which are taxed as partnerships by default, capital gains and losses are allocated to partners on specific tax forms (Schedule K-1).
LLCs that elect to be taxed as C-Corps, or C-Corps don’t pay capital gains tax, but do recognize revenue for disposing of crypto for less than the acquisition cost. Understanding these nuances is crucial for compliance.Record-Keeping Is Critical
Founders should maintain wallet histories, transaction records, and exchange activity logs to support tax filings. The IRS places the burden of proof on taxpayers in audits.409A Valuations
If your startup offers equity compensation (stock options), obtaining regular obtaining regular 409a valuations is essential to ensure proper accounting of stock options expenses, cap table management, and reducing the risk of IRS penalties.
Crypto on the Balance Sheet: An Overview
With the recent adoption of fair value accounting for certain digital assets, crypto businesses now have more flexibility in presenting their financial position:
Fair Value Accounting:
Under new GAAP standards effective December 15, 2024, businesses can mark crypto assets like Bitcoin and Ethereum at fair value. This change better reflects economic reality of these holdings at financial reporting periods. However, not all crypto assets receive such treatment. Specifically, self-created property – your company’s own token – would be accounted for differently.Stablecoins and NFTs:
Stablecoins are not classified as cash equivalents under current accounting rules so companies need to assess GAAP or IFRS for the proper accounting, presentation and disclosures related to such assets. NFTs were specifically excluded from the GAAP update for Fair Value Accounting; therefore, NFTs must be recorded at, and held at, cost and subject to impairment.Balance Sheet Implications :
Accurate accounting for digital assets, including clear presentation, helps paint a clear picture of a company’s financial health. While its “easier” to organize the balance sheet by wallet, proper balance sheet presentation should be organized by asset type, not by wallet
Handling SAFEs, SAFTs, and Paying People in Crypto
SAFEs and SAFTs
a) SAFEs (Simple Agreements for Future Equity):There is a diversity of practice among accountants regarding SAFEs (whether they are accounted for as liabilities of the company or equity), so working with an expert that can assist with the fact-dependent analysis will ensure the most defensible approach.b) SAFTs (Simple Agreements for Future Tokens): These are typically liabilities that are extinguished at the token generation event but may require ongoing accounting adjustments.
Here again, a fact-dependent analysis is required to ensure proper accounting for the timing of any revenue recognition from the sale of SAFT agreements. Founders should create detailed schedules for token sales and vesting agreements to aid in operational and management accounting, as well as financial reporting.Paying Employees in Crypto
a) Compliance Risks: Paying contractors or employees in crypto creates tax implications for both the business and recipients. Additionally, experienced accounting professionals can assist with strategies to reduce the risk of long-term contractors (payroll tax audits and penalties).b) Withholding Requirements:: Bonuses or fringe benefits paid in tokens require tax withholding, adding complexity to payroll operations.
c) Plan Ahead:
For investors, financial audits are critical for assessing a company's long-term viability and growth potential.
Best Practices for Crypto Financial Management
Control Access to Funds:
Use multi-signature wallets or tiered custody solutions to ensure proper oversight and security of crypto assets.
Manage Accounts Receivable (AR):
Regularly review aging accounts receivable (AR) and write off bad debts as expenses to reduce taxable income.Outsource for Expertise:
A well-rounded outsourced team can handle bookkeeping, compliance, payroll processing, crypto payroll processing, and even fractional CFO duties at a fraction of the cost of full-time hires.
Final Thoughts: A Strong Financial Foundation Fuels Growth
As TNF experts emphasized, building a solid financial foundation is not just about avoiding problems—it’s about preparing for success. Whether it’s tax compliance, financial reporting, or scaling operations, crypto startups that invest in good accounting practices will be better positioned to navigate growth and regulatory challenges.
If you’re ready to take your crypto startup’s financial management to the next level, call on The Network Firm. Let us do the accounting so, you can focus on what matters most: building, growing and innovating.
Get In Touch
Contact The Network Firm, the largest crypto-only CPA firm in the U.S., for expert assistance with audit, accounting, and advisory needs. Our team of professionals has extensive experience leading clients through successful engagements for varous types of crypto companies, including stablecoins, exchanges, custodians, miners, and more.
Noah Buxton, CEO
Author Bio:
Noah has more than 15 years of attest, legal, IT and regulatory compliance experience. Noah sets the strategy and oversees execution of strategy at The Network Firm. While Noah advises public blockchain and virtual currency clients on myriad industry-specific issues, his expertise lies in licensing, IT & Security matters as well as attest and assurance reporting for Exchanges, Asset-backed token issuers, lenders and blockchain and cryptocurrency startups.
Noah is a member of the American Institute of Certified Public Accountants (AICPA), Florida Institute of Certified Public Accountants (FICPA), and a former member of the California Bar Association and International Association of Privacy Professionals (IAPP). Noah has served in active roles for working groups with the AICPA and Chamber of Digital Commerce (CODC) since 2018 and hods a current seat on the Steering Committee for C4’s Cryptocurrency Security Standard (CCSS).
Connect with Noah Buxton on LinkedIn/Twitter for more expert advice.