There is no standardized or universal way how to treat staking transactions in accounting. For this reason, many CPAs and those in finance teams within Web3 struggle with establishing a clear internal process early on.
Oftentimes, financial professionals joining Web3 startups and DAOs are not onboarded into an established financial process. Instead, the expectation is to develop the internal financial process for keeping up with the books and reporting.
Add DeFi into the plate of a CPA or a financial controller and accounting becomes significantly more complex. Especially since financial professionals will have to treat certain DeFi transaction events based on their best judgment, as clear regulatory guidelines may not exist.
Handling Staking Income
This is where things get tricky from a reporting and accounting perspective. It is clear that web3 accounting professionals must simply report the revenue generated in a staking pool as income. The big question is how to treat the transactions when sending assets to the staking pool. In addition, how to account for the staking income when the original staked amount, and the income, is delivered in a single line item. Often, it doesn’t reflect the accruals on the blockchain and they deliver them at the un-staking event to the wallet. Isolating income is the challenge.
Pool Deposits/ Withdrawals
Depositing and withdrawal from a pool are likely, not taxable events. It is similar to an internal wallet transfer hence the transactions can be treated as non-taxable and gain/loss is not necessary to be calculated.
If you directly deposit the income into your wallet without separating the original staked amount into individual transactions, then you can easily reconcile the process. All you need to do is classify the transactions as “Income.
The situation becomes complex when a single transaction returns the original staked amount along with the staking reward. For example:
- You enter the pool by depositing 100 USDC into the staking pool
- Staking period ends
- You receive 110 USDC (including the 100 USDC original staked amount + 10 USDC staking income)
It would be incorrect to treat the entire 110 USDC as income. Therefore solutions like Cryptoworth allow you to split this incoming transaction into multiple parts (we call them shards).
This process will create two additional transactions and make the original transaction “ignored” and kept in the ledger as a reference to the two shards. As a user, you will be able to split the transaction by percentage or amount.
Furthermore, you can split the transaction into multiple shards. Then each individual shard can be classified, or given accounting treatments separately.
An organization needs to define the accounting treatment of staking activities for consistent financial reporting, regardless of whether or not the operating entity is in a taxable jurisdiction. Advanced tools like transaction splitting are necessary to reconcile complex income in the crypto ledger software for accurate reporting and bookkeeping.
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