#244: A Finance Professional’s Lessons Pivoting into the Crypto Industry by Allen Au

📊Unpacking the nuances of finance operations in crypto

TPan here! I’m getting married this weekend so I won’t be writing my usual piece today. However, I do have some great content for you from someone else in the space.

Today we have Allen Au and he’ll share some insights on the finance and tax implications of operating a crypto or web3 business. I met Allen over a year ago while I was early in my web3 and writing journey and it’s great to see him bring his financial expertise to the space.

Allen works with NFT Projects, Defi Protocols, and Layer 1 blockchains and helps them understand their business better. He writes at Ease & Effort, talking about his experiences working in Crypto after taking a career break. 

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Here are the Top 3 Things I wish I knew as a financial professional pivoting into the Crypto Industry

It doesn’t matter who you are, you’ll touch everything - investments, treasury, tax, payroll, financing, accounting, forecasting, operations, legal, and reporting - all across fiat and crypto, domestic and international.

Knowing the above, here are the Top 3 Things I wish I knew as a financial professional pivoting into the Crypto Industry:

1. All Crypto-Income is a Triple-Tax Scenario

2. Global hiring & compensation is absurdly cumbersome

3. Numbers are cool, what’s the impact to the business?

Photo by Lizzi Sassman on Unsplash

All Crypto-Income is a Triple-Tax Scenario

Something that comes as a shock to every single founder I’ve ever worked with: All crypto revenue is triple-taxed.

Here’s how:

1. You get taxed when you earn it (income tax).

2. You’ll get taxed when you sell it (capital gains tax).

3. And you’ll get the ‘oops’ tax for not having clean acquisition and disposal records to help you optimize financial positions year over year (optimization tax).

This is the most strenuous example, and there are ways to mitigate some of the tax burdens. That said, I can’t stress this enough: Earning crypto revenue is a triple-tax issue, compared to earning fiat revenue, which is usually a single tax issue.

More importantly, the conditions of a triple-tax scenario mean it’s really hard to calculate whether or not your company is getting a good deal by paying in crypto. The unhelpful answer is “it depends”.

In my experience, unless uniquely structured, you are always at a disadvantage paying for things in crypto as opposed to paying in fiat. One of the three taxes rear its end somewhere.

To reduce tax burdens, the way your company is structured, the way you acquired the tokens, and your tax positions will quite literally define your financial performance.

Photo by Nik Shuliahin 💛💙 on Unsplash

Global hiring & compensation is absurdly cumbersome

The hallmark of a Web3 company is that it’s remote, and it’s global. The talent can come anywhere. However, hiring individuals in different countries is intense. You’ll have to deal with the concept of “EORs”, and you’ll realize that all of them have more downs than ups.

To give you a quick rundown, to hire someone in another country you need to establish a legal presence. You can do this by forming a direct legal entity there, or you can save yourself the hassle and find an “Employment of Record”, or another company, be your proxy. They’ll help you maintain compliance with each local jurisdiction’s labor laws and handle payroll payments so long as you fund them.

But then you’ll realize not all EOR types are the same (ADP, Remote, Deel, etc) and they all come with ups and downs - and it gets dicey when we introduce the most important thing in Web3: Crypto compensation.

Offering base fiat salary and token-based compensation compounds the level of difficulty, and if your token has restrictions and stipulations that basically make it illiquid for some time- whether protocol backed, or legal - it makes trying to pay individuals in other countries incredibly disfavorable. 

To put it differently, do you know when the tax event for an employee who has been “granted tokens that vest monthly” is? The answer is quite literally it depends on the country. Some countries tax the individual on the distribution date (date you receive), some tax you at the date it vests, and some even try to tax you at the date granted. You bet your employees are going to ask how they can cover a tax bill with something that is currently illiquid.

…Unless you don’t care for your employees and you shift the income-tax problem to them. However, Web3 professionals are some of the most vocal employee base out there.

Think carefully.

Photo by Mika Baumeister on Unsplash

Numbers are cool, what’s the impact to the business?

Perhaps the most important thing, I’ve worked with enough financial professionals to know that it’s very easy to miss the forest for a tree. I have observed individuals obsess over the technical accounting of gas fees, and get worked up about security when the reality is this:

What are the material items impacting the business, and what do they mean?

• If we’re making a partnership agreement and we’re trying to sweeten the pot by offering a mix of cash and tokens from our treasury, is it tax advantageous or disadvantageous to be using any of our tokens knowing that they were acquired at a very low cost? (we will be paying the capital gains tax when we use it to sweeten deals, which means we’ll be expending cash later, but not now)

• If we’re offering token base compensation with net-settlement, what’s the impact to our cash position, and ultimately how is this program going to reduce our runway (or even annihilate it if the token price rises)

• If we’re forecasting the performance of the business, and our future income is based on fluctuating values, have we factored in black-swan events (which feels like a monthly occurrence in this industry) and do we have an “oh shit” plan when the token value drops 90% in a week?

Effectively, the question I wish financial professionals asked more is “so what?” and “is it material?”, and for them to focus on those across the business. Perhaps fewer crypto projects would fail if 1) they had financial professionals and 2) financial professionals were working on the business, not in the business.

Contrarian thought: I don’t care about gas fees and stop talking to me about the importance of the accounting behind it. It’s nowhere near a material problem.

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Understanding the financial business side of crypto isn't the most exciting topic, but it's an important one as it can make the difference in whether or not the company can continue to exist to pay its employees, and be of service to Web3.

If you enjoyed this piece from Allen, check out Ease & Effort or reach out to him on LinkedIn. He’d be happy to provide a free simple sanity check and “talk you out of” things you don’t need to do, especially in a bear market.

See you next week as a married TPan!