Token Generation Events Guide: Part 2
In Part 2 of this article, co-authored with r3gen finance, we examine the process of tracking and reconciling TGE transactions as an organization, the tax treatment of TGE transactions and how to automate TGE accounting and compliance.
Gui Laliberté
·
Elliot Watts · CFO at r3gen finance, ACA
Updated on
Jul 25, 2023
How Can Issuers Track TGE Transactions and Reconcile Their Financial Records?
This section will provide an analysis on tracking transactions associated with TGE tokens, accounting for expenses related to their management, and reconcile financial statements if necessary.
Tracking Token Transactions and Balances
Due to the structure of blockchains - their immutability, transparency, and traceability,
once a record has been added to the blockchain, it is visible to everyone, can be freely audited by users, and can't be tampered with without controlling the majority of the network.
These aspects may seem to offer an easier way to track token transactions and balances related to TGEs. However, the lack of direct integrations between blockchains and the existing financial infrastructure makes the tracking and reconciliation process more challenging for web3 organizations.
This is primarily due to organizations not having the ability to reconcile their on-chain activity against their monthly institutional statements, which are generally viewed as a trusted source of information. Instead, projects must rely on block explorers, as well as centralized exchanges (CEXs) and other centralized finance (CeFi) providers.
Regarding TGEs, the recommended source web3 organizations should keep track of include all the transactions, balances, smart contracts, and other data related to the TGE.
On the other hand, many crypto organizations regularly utilize CEXs and CeFi providers to exchange crypto for fiat and access various digital asset services. However, most transactions take place off-chain without recording them on blockchains. This means that web3 projects must rely on them to track and reconcile transactional data in addition to the on-chain records accessed via block explorers.
But CEXs and CeFi providers are only reliable sources to the point when their platforms can be accessed by the public. A sudden bankruptcy or a security issue can easily lead to inaccessible account data and a flawed reconciliation process.
In general, block explorers are considered more reliable sources than centralized services, as they pull data directly from blockchain networks. But while the explorers of established chains (e.g., Etherscan for Ethereum) are trustworthy and dependable, organizations might encounter issues when tracking transactions on newer chains due to their less robust infrastructures.
Integral leverages RPC APIs from leading node providers to read data directly from blockchains and ensure the accuracy of the records. The accounting stack also offers real-time visibility into web3 organizations' treasuries via powerful integrations, so all transactions, balances, and accounts can be tracked in one place.
Reconciling Financial Statements
Reconciliation is a common practice in the accounting world and refers to the process of ensuring that one account's balance matches with the other.
This process is more challenging in crypto. Organizations must rely on block explorers and centralized providers instead of monthly institutional statements to reconcile their financial statements.
When a web3 organization navigates to its treasury's address via a block explorer, it will display its ins and outs, including data about dates, transaction fees, the sender's and the recipient's wallets, the asset, and the transfer amount. For example, the address of Arbitrum One's L1 gateway router shows the following transactions:
Source: Etherscan
As illustrated above, there's no category displayed next to transactions. This means that web3 CFOs must manually categorize each transaction related to TGEs to be able to reconcile them against their financial statements.
This task could be manageable for a web3 startup with only a few transactions. But it can easily turn into an accounting nightmare for projects with massive transactional activity, and where the token generation event only accounts for a small part of all its transfers.
With Integral's intuitive rule creation, web3 organizations can automatically categorize TGE transactions to filter out the noise. As they have all their wallets, exchange accounts, and balances in one place with minute-by-minute pricing, it greatly simplifies the reconciliation process for CFOs.
Accounting for Token Management Expenses
During token generation events, issuers rarely distribute all assets to their communities, investors, team members, and other participants. Instead, the entity that issues the tokens allocates a small percentage of the supply to its own treasury for various purposes (e.g., cover different expenses and foster protocol growth).
TGE tokens allocated to the issuer are similar to when a retail business generates vouchers that provide discounts on future purchases but without distributing them to customers. Such cases don't necessarily have to be considered for accounting purposes – at least until the assets remain untouched in the issuer's wallets.
The situation changes instantly when an exchange takes place between the issuer and other parties. After token generation events, it is common for web3 organizations to utilize their native assets in their treasuries to cover different expenses.
Suppose a web3 project allocated 1 million native tokens to its treasury, from which it utilized 10,000 of these assets worth $1 each to pay an agency to launch a PR campaign. In such a case, the agency is considered a third party, and the transaction is accounted for by the following general rules:
The debit side of the entry includes the substance of what the TGE issuer receives in return for its tokens
The credit side of the entry contains the characteristics of the assets generated and delivered by the TGE entity
While the first point is straightforward, the credit side is determined by the issuer's obligations incurred after issuing the tokens. We have already reviewed the potential assessment under applicable IFRS standards in the first part of the article.
Based on that, the web3 project's revenue in the example is recognized as deferred revenue under IFRS 15, adding the following journal entry:
What Are the Tax Implications of Token Generation Events?
Besides tracking and accounting for transactions, it's also important to explore the tax implications of token generation events.
An issuer's proceeds from its TGE may be subject to taxes based on the recognition of tokens, with the most common treatment including:
Deferred revenue: In the case of deferred revenue, the proceeds of a TGE are recognized as a prepayment for goods or services to be delivered at a later date. If the issuer meets certain requirements, it may defer the recognition of the income until the following tax year.
Debt: If there is a definite obligation to repay investors with interest, TGE tokens may be classified as debt. In this case, neither issuers nor contributors might not be subject to current income taxes, but this would likely result in tax liabilities for both parties after interest payments occur until the loan is ever forgiven.
Property: If a token is recognized as property, the issuer has to pay taxes up front, which is equal to the amount of received proceeds, less any basis in the tokens.
Equity: If characterized as the equity of a corporation, issuers may not be subject to current tax but may defer taxes on any appreciated digital asset utilized to acquire the TGE tokens until used or disposed of the assets.
In most cases, issuers pay taxes after the proceeds they receive during TGEs. Tokens that have been generated by a corporate entity but were allocated to treasury wallets for organizations' own use are generally not subject to tax treatment.
If an exchange takes place, the parties issuers distributed tokens to will become subject to income taxes. Such cases include covering employee salaries or the services of third parties like PR agencies or partner organizations.
If an exchange takes place (e.g., users complete different tasks), participants of crypto airdrops [Add link to crypto airdrop taxation article] most likely have to pay income taxes after the assets they received. In some jurisdictions (like the UK or Germany), this may not be the case for airdrops like Arbitrum's, where tokens were distributed to participants who were previously active in the community before the event took place.
Regarding tax planning, issuers may be able to deduct expenses that were incurred during token generation events to decrease their tax liabilities. An example includes the deduction of a bounty airdrop if it is considered payment for marketing activities.
Finally, income from TGEs can be reported as "other income" via Form 1040 Schedule 1 in the US for individuals or as part of corporate tax returns for organizations (Form 1120, Form 1120-S, or Form 1065). In the UK, individual taxpayers can file this revenue as "miscellaneous income" via the HS325 Self Assessment helpsheet. Organizations in the United Kingdom can report income from TGEs as corporation tax online or via the CT600 form.
Besides income taxes, TGE contributors must report capital gains taxes when they dispose of their tokens and realize a profit. While US taxpayers can report this via Form 8949 and Form 1040 Schedule D, individuals in the UK can use either the Self Assessment Tax Return or the real-time Capital Gains Tax Service (businesses can file CGT as corporation tax).
Consult with an expert to accurately report your organization's taxes and ensure compliance with regulations.
Moreover, TGE issuers can leverage Integral's accounting stack to calculate capital gains and losses automatically and synchronize them with their ERP of choice. They can also generate compliant reports for any purpose, including crypto P&L, cost basis, and position closures.
Automatize TGE Accounting and Compliance
Transaction tracking and reconciliation are just as important tasks for web3 CFOs as accounting for expenses and reporting taxes related to token generation events.
But organizations don't necessarily have to manage these processes on their own.
With Integral, TGE issuers can take charge of their accounting and reach blazing-fast month-ends with automated workflows. Simultaneously, real-time visibility of their treasuries and automatic capital gains/losses calculations supercharge decision-making and help ensure compliance with regulations.
Ready to take your web3 accounting to the next level? Book a time with our team to get started!
How Can Issuers Track TGE Transactions and Reconcile Their Financial Records?
This section will provide an analysis on tracking transactions associated with TGE tokens, accounting for expenses related to their management, and reconcile financial statements if necessary.
Tracking Token Transactions and Balances
Due to the structure of blockchains - their immutability, transparency, and traceability,
once a record has been added to the blockchain, it is visible to everyone, can be freely audited by users, and can't be tampered with without controlling the majority of the network.
These aspects may seem to offer an easier way to track token transactions and balances related to TGEs. However, the lack of direct integrations between blockchains and the existing financial infrastructure makes the tracking and reconciliation process more challenging for web3 organizations.
This is primarily due to organizations not having the ability to reconcile their on-chain activity against their monthly institutional statements, which are generally viewed as a trusted source of information. Instead, projects must rely on block explorers, as well as centralized exchanges (CEXs) and other centralized finance (CeFi) providers.
Regarding TGEs, the recommended source web3 organizations should keep track of include all the transactions, balances, smart contracts, and other data related to the TGE.
On the other hand, many crypto organizations regularly utilize CEXs and CeFi providers to exchange crypto for fiat and access various digital asset services. However, most transactions take place off-chain without recording them on blockchains. This means that web3 projects must rely on them to track and reconcile transactional data in addition to the on-chain records accessed via block explorers.
But CEXs and CeFi providers are only reliable sources to the point when their platforms can be accessed by the public. A sudden bankruptcy or a security issue can easily lead to inaccessible account data and a flawed reconciliation process.
In general, block explorers are considered more reliable sources than centralized services, as they pull data directly from blockchain networks. But while the explorers of established chains (e.g., Etherscan for Ethereum) are trustworthy and dependable, organizations might encounter issues when tracking transactions on newer chains due to their less robust infrastructures.
Integral leverages RPC APIs from leading node providers to read data directly from blockchains and ensure the accuracy of the records. The accounting stack also offers real-time visibility into web3 organizations' treasuries via powerful integrations, so all transactions, balances, and accounts can be tracked in one place.
Reconciling Financial Statements
Reconciliation is a common practice in the accounting world and refers to the process of ensuring that one account's balance matches with the other.
This process is more challenging in crypto. Organizations must rely on block explorers and centralized providers instead of monthly institutional statements to reconcile their financial statements.
When a web3 organization navigates to its treasury's address via a block explorer, it will display its ins and outs, including data about dates, transaction fees, the sender's and the recipient's wallets, the asset, and the transfer amount. For example, the address of Arbitrum One's L1 gateway router shows the following transactions:
Source: Etherscan
As illustrated above, there's no category displayed next to transactions. This means that web3 CFOs must manually categorize each transaction related to TGEs to be able to reconcile them against their financial statements.
This task could be manageable for a web3 startup with only a few transactions. But it can easily turn into an accounting nightmare for projects with massive transactional activity, and where the token generation event only accounts for a small part of all its transfers.
With Integral's intuitive rule creation, web3 organizations can automatically categorize TGE transactions to filter out the noise. As they have all their wallets, exchange accounts, and balances in one place with minute-by-minute pricing, it greatly simplifies the reconciliation process for CFOs.
Accounting for Token Management Expenses
During token generation events, issuers rarely distribute all assets to their communities, investors, team members, and other participants. Instead, the entity that issues the tokens allocates a small percentage of the supply to its own treasury for various purposes (e.g., cover different expenses and foster protocol growth).
TGE tokens allocated to the issuer are similar to when a retail business generates vouchers that provide discounts on future purchases but without distributing them to customers. Such cases don't necessarily have to be considered for accounting purposes – at least until the assets remain untouched in the issuer's wallets.
The situation changes instantly when an exchange takes place between the issuer and other parties. After token generation events, it is common for web3 organizations to utilize their native assets in their treasuries to cover different expenses.
Suppose a web3 project allocated 1 million native tokens to its treasury, from which it utilized 10,000 of these assets worth $1 each to pay an agency to launch a PR campaign. In such a case, the agency is considered a third party, and the transaction is accounted for by the following general rules:
The debit side of the entry includes the substance of what the TGE issuer receives in return for its tokens
The credit side of the entry contains the characteristics of the assets generated and delivered by the TGE entity
While the first point is straightforward, the credit side is determined by the issuer's obligations incurred after issuing the tokens. We have already reviewed the potential assessment under applicable IFRS standards in the first part of the article.
Based on that, the web3 project's revenue in the example is recognized as deferred revenue under IFRS 15, adding the following journal entry:
What Are the Tax Implications of Token Generation Events?
Besides tracking and accounting for transactions, it's also important to explore the tax implications of token generation events.
An issuer's proceeds from its TGE may be subject to taxes based on the recognition of tokens, with the most common treatment including:
Deferred revenue: In the case of deferred revenue, the proceeds of a TGE are recognized as a prepayment for goods or services to be delivered at a later date. If the issuer meets certain requirements, it may defer the recognition of the income until the following tax year.
Debt: If there is a definite obligation to repay investors with interest, TGE tokens may be classified as debt. In this case, neither issuers nor contributors might not be subject to current income taxes, but this would likely result in tax liabilities for both parties after interest payments occur until the loan is ever forgiven.
Property: If a token is recognized as property, the issuer has to pay taxes up front, which is equal to the amount of received proceeds, less any basis in the tokens.
Equity: If characterized as the equity of a corporation, issuers may not be subject to current tax but may defer taxes on any appreciated digital asset utilized to acquire the TGE tokens until used or disposed of the assets.
In most cases, issuers pay taxes after the proceeds they receive during TGEs. Tokens that have been generated by a corporate entity but were allocated to treasury wallets for organizations' own use are generally not subject to tax treatment.
If an exchange takes place, the parties issuers distributed tokens to will become subject to income taxes. Such cases include covering employee salaries or the services of third parties like PR agencies or partner organizations.
If an exchange takes place (e.g., users complete different tasks), participants of crypto airdrops [Add link to crypto airdrop taxation article] most likely have to pay income taxes after the assets they received. In some jurisdictions (like the UK or Germany), this may not be the case for airdrops like Arbitrum's, where tokens were distributed to participants who were previously active in the community before the event took place.
Regarding tax planning, issuers may be able to deduct expenses that were incurred during token generation events to decrease their tax liabilities. An example includes the deduction of a bounty airdrop if it is considered payment for marketing activities.
Finally, income from TGEs can be reported as "other income" via Form 1040 Schedule 1 in the US for individuals or as part of corporate tax returns for organizations (Form 1120, Form 1120-S, or Form 1065). In the UK, individual taxpayers can file this revenue as "miscellaneous income" via the HS325 Self Assessment helpsheet. Organizations in the United Kingdom can report income from TGEs as corporation tax online or via the CT600 form.
Besides income taxes, TGE contributors must report capital gains taxes when they dispose of their tokens and realize a profit. While US taxpayers can report this via Form 8949 and Form 1040 Schedule D, individuals in the UK can use either the Self Assessment Tax Return or the real-time Capital Gains Tax Service (businesses can file CGT as corporation tax).
Consult with an expert to accurately report your organization's taxes and ensure compliance with regulations.
Moreover, TGE issuers can leverage Integral's accounting stack to calculate capital gains and losses automatically and synchronize them with their ERP of choice. They can also generate compliant reports for any purpose, including crypto P&L, cost basis, and position closures.
Automatize TGE Accounting and Compliance
Transaction tracking and reconciliation are just as important tasks for web3 CFOs as accounting for expenses and reporting taxes related to token generation events.
But organizations don't necessarily have to manage these processes on their own.
With Integral, TGE issuers can take charge of their accounting and reach blazing-fast month-ends with automated workflows. Simultaneously, real-time visibility of their treasuries and automatic capital gains/losses calculations supercharge decision-making and help ensure compliance with regulations.
Ready to take your web3 accounting to the next level? Book a time with our team to get started!
How Can Issuers Track TGE Transactions and Reconcile Their Financial Records?
This section will provide an analysis on tracking transactions associated with TGE tokens, accounting for expenses related to their management, and reconcile financial statements if necessary.
Tracking Token Transactions and Balances
Due to the structure of blockchains - their immutability, transparency, and traceability,
once a record has been added to the blockchain, it is visible to everyone, can be freely audited by users, and can't be tampered with without controlling the majority of the network.
These aspects may seem to offer an easier way to track token transactions and balances related to TGEs. However, the lack of direct integrations between blockchains and the existing financial infrastructure makes the tracking and reconciliation process more challenging for web3 organizations.
This is primarily due to organizations not having the ability to reconcile their on-chain activity against their monthly institutional statements, which are generally viewed as a trusted source of information. Instead, projects must rely on block explorers, as well as centralized exchanges (CEXs) and other centralized finance (CeFi) providers.
Regarding TGEs, the recommended source web3 organizations should keep track of include all the transactions, balances, smart contracts, and other data related to the TGE.
On the other hand, many crypto organizations regularly utilize CEXs and CeFi providers to exchange crypto for fiat and access various digital asset services. However, most transactions take place off-chain without recording them on blockchains. This means that web3 projects must rely on them to track and reconcile transactional data in addition to the on-chain records accessed via block explorers.
But CEXs and CeFi providers are only reliable sources to the point when their platforms can be accessed by the public. A sudden bankruptcy or a security issue can easily lead to inaccessible account data and a flawed reconciliation process.
In general, block explorers are considered more reliable sources than centralized services, as they pull data directly from blockchain networks. But while the explorers of established chains (e.g., Etherscan for Ethereum) are trustworthy and dependable, organizations might encounter issues when tracking transactions on newer chains due to their less robust infrastructures.
Integral leverages RPC APIs from leading node providers to read data directly from blockchains and ensure the accuracy of the records. The accounting stack also offers real-time visibility into web3 organizations' treasuries via powerful integrations, so all transactions, balances, and accounts can be tracked in one place.
Reconciling Financial Statements
Reconciliation is a common practice in the accounting world and refers to the process of ensuring that one account's balance matches with the other.
This process is more challenging in crypto. Organizations must rely on block explorers and centralized providers instead of monthly institutional statements to reconcile their financial statements.
When a web3 organization navigates to its treasury's address via a block explorer, it will display its ins and outs, including data about dates, transaction fees, the sender's and the recipient's wallets, the asset, and the transfer amount. For example, the address of Arbitrum One's L1 gateway router shows the following transactions:
Source: Etherscan
As illustrated above, there's no category displayed next to transactions. This means that web3 CFOs must manually categorize each transaction related to TGEs to be able to reconcile them against their financial statements.
This task could be manageable for a web3 startup with only a few transactions. But it can easily turn into an accounting nightmare for projects with massive transactional activity, and where the token generation event only accounts for a small part of all its transfers.
With Integral's intuitive rule creation, web3 organizations can automatically categorize TGE transactions to filter out the noise. As they have all their wallets, exchange accounts, and balances in one place with minute-by-minute pricing, it greatly simplifies the reconciliation process for CFOs.
Accounting for Token Management Expenses
During token generation events, issuers rarely distribute all assets to their communities, investors, team members, and other participants. Instead, the entity that issues the tokens allocates a small percentage of the supply to its own treasury for various purposes (e.g., cover different expenses and foster protocol growth).
TGE tokens allocated to the issuer are similar to when a retail business generates vouchers that provide discounts on future purchases but without distributing them to customers. Such cases don't necessarily have to be considered for accounting purposes – at least until the assets remain untouched in the issuer's wallets.
The situation changes instantly when an exchange takes place between the issuer and other parties. After token generation events, it is common for web3 organizations to utilize their native assets in their treasuries to cover different expenses.
Suppose a web3 project allocated 1 million native tokens to its treasury, from which it utilized 10,000 of these assets worth $1 each to pay an agency to launch a PR campaign. In such a case, the agency is considered a third party, and the transaction is accounted for by the following general rules:
The debit side of the entry includes the substance of what the TGE issuer receives in return for its tokens
The credit side of the entry contains the characteristics of the assets generated and delivered by the TGE entity
While the first point is straightforward, the credit side is determined by the issuer's obligations incurred after issuing the tokens. We have already reviewed the potential assessment under applicable IFRS standards in the first part of the article.
Based on that, the web3 project's revenue in the example is recognized as deferred revenue under IFRS 15, adding the following journal entry:
What Are the Tax Implications of Token Generation Events?
Besides tracking and accounting for transactions, it's also important to explore the tax implications of token generation events.
An issuer's proceeds from its TGE may be subject to taxes based on the recognition of tokens, with the most common treatment including:
Deferred revenue: In the case of deferred revenue, the proceeds of a TGE are recognized as a prepayment for goods or services to be delivered at a later date. If the issuer meets certain requirements, it may defer the recognition of the income until the following tax year.
Debt: If there is a definite obligation to repay investors with interest, TGE tokens may be classified as debt. In this case, neither issuers nor contributors might not be subject to current income taxes, but this would likely result in tax liabilities for both parties after interest payments occur until the loan is ever forgiven.
Property: If a token is recognized as property, the issuer has to pay taxes up front, which is equal to the amount of received proceeds, less any basis in the tokens.
Equity: If characterized as the equity of a corporation, issuers may not be subject to current tax but may defer taxes on any appreciated digital asset utilized to acquire the TGE tokens until used or disposed of the assets.
In most cases, issuers pay taxes after the proceeds they receive during TGEs. Tokens that have been generated by a corporate entity but were allocated to treasury wallets for organizations' own use are generally not subject to tax treatment.
If an exchange takes place, the parties issuers distributed tokens to will become subject to income taxes. Such cases include covering employee salaries or the services of third parties like PR agencies or partner organizations.
If an exchange takes place (e.g., users complete different tasks), participants of crypto airdrops [Add link to crypto airdrop taxation article] most likely have to pay income taxes after the assets they received. In some jurisdictions (like the UK or Germany), this may not be the case for airdrops like Arbitrum's, where tokens were distributed to participants who were previously active in the community before the event took place.
Regarding tax planning, issuers may be able to deduct expenses that were incurred during token generation events to decrease their tax liabilities. An example includes the deduction of a bounty airdrop if it is considered payment for marketing activities.
Finally, income from TGEs can be reported as "other income" via Form 1040 Schedule 1 in the US for individuals or as part of corporate tax returns for organizations (Form 1120, Form 1120-S, or Form 1065). In the UK, individual taxpayers can file this revenue as "miscellaneous income" via the HS325 Self Assessment helpsheet. Organizations in the United Kingdom can report income from TGEs as corporation tax online or via the CT600 form.
Besides income taxes, TGE contributors must report capital gains taxes when they dispose of their tokens and realize a profit. While US taxpayers can report this via Form 8949 and Form 1040 Schedule D, individuals in the UK can use either the Self Assessment Tax Return or the real-time Capital Gains Tax Service (businesses can file CGT as corporation tax).
Consult with an expert to accurately report your organization's taxes and ensure compliance with regulations.
Moreover, TGE issuers can leverage Integral's accounting stack to calculate capital gains and losses automatically and synchronize them with their ERP of choice. They can also generate compliant reports for any purpose, including crypto P&L, cost basis, and position closures.
Automatize TGE Accounting and Compliance
Transaction tracking and reconciliation are just as important tasks for web3 CFOs as accounting for expenses and reporting taxes related to token generation events.
But organizations don't necessarily have to manage these processes on their own.
With Integral, TGE issuers can take charge of their accounting and reach blazing-fast month-ends with automated workflows. Simultaneously, real-time visibility of their treasuries and automatic capital gains/losses calculations supercharge decision-making and help ensure compliance with regulations.
Ready to take your web3 accounting to the next level? Book a time with our team to get started!
Get a demo
See how Integral can help you manage all of your financial data and operations in one place and scale your business with confidence.
Get a demo
See how Integral can help you manage all of your financial data and operations in one place and scale your business with confidence.
Get a demo
See how Integral can help you manage all of your financial data and operations in one place and scale your business with confidence.