Property, not money
The foundational rule is that digital assets are treated as property. Paying a contractor in a stablecoin is not like wiring dollars; it is disposing of an asset, which realises a gain or loss, and separately paying for a service. Every swap, every payment, every conversion is a disposal with a tax consequence.
A business making a few hundred on-chain transactions a year therefore has a few hundred taxable events, each needing a cost basis, a disposal value and a holding period.
Cost basis is the hard part
If you acquired the same token at different times and prices, which lot did you just spend? The answer changes your gain substantially. Specific identification gives the most control but requires contemporaneous records identifying the exact units. Without that, you fall back to first-in-first-out.
Guidance has also tightened around tracking basis on a per-wallet or per-account basis rather than pooling everything universally. For a business with assets across several exchanges and self-custody wallets, that means basis has to be tracked per location, not just in aggregate.
Reconciling wallets
A wallet is not a bank account. There is no statement, no payee name, and no categorisation. What you have is a list of hashes, addresses and token amounts. Turning that into books means:
- Identifying every wallet and exchange account the business controls, including ones used once and forgotten.
- Pulling complete transaction history for each, including internal transfers.
- Marking transfers between your own wallets as non-taxable movements rather than disposals, which is the single most common source of wildly overstated gains.
- Valuing every transaction in dollars at the time it occurred, which for thinly traded tokens requires a documented and consistent pricing source.
- Accounting for gas fees, which are generally either part of the cost basis or a deductible expense depending on what they were spent on.
The situations that get complicated
Staking and rewards
Rewards are generally income at fair market value when you gain dominion and control over them, establishing a new cost basis at that value. Those rewards then carry their own gain or loss when later disposed of.
Paying staff or contractors in tokens
This is both compensation, valued in dollars at payment, and a disposal of the asset used. Both sides need recording, and the compensation side carries normal payroll or 1099 obligations.
DeFi, liquidity and wrapping
Providing liquidity, wrapping a token, or depositing into a lending protocol may or may not be a disposal depending on the specific mechanics. This is genuinely unsettled in places, which makes documenting the position you took and why considerably more important than usual.
Losses and worthless tokens
A token that has collapsed in value is not deductible simply because it is down. There are specific requirements around disposal or worthlessness, and abandoned tokens sitting in a wallet usually do not qualify.
What good looks like
A business transacting on-chain should maintain a complete wallet inventory, use subledger software that imports from every chain and exchange in use, reconcile it monthly rather than annually, document its pricing source and accounting positions, and keep the resulting gain and loss detail in a form that reconciles to the general ledger.
The annual reconstruction approach, where someone exports a year of transactions in March and tries to make sense of them, is where the expensive errors live. On-chain history is permanent and public, which means mistakes are both discoverable and uncorrectable after the fact.
TallyWise provides this as part of our crypto and Web3 accounting services. Book a call to talk through your situation.
