From Niche to Necessity: Tax & Accounting for Web3 and Digital Assets

Taylor Zork, CPA [00:00:10]:

Hello and welcome to Niche. To Necessity. This is a podcast from Crypto CFOs. Today we have a very special guest. We have Joe David. He is a crypto accountant hailing from Cheltenham, England. And he is the co founder of Nephos Group and Mina. Welcome, Joe.

Joe David [00:00:26]:

Hey, how are you doing, Taylor?

Taylor Zork, CPA [00:00:27]:

Good. Thanks for joining us. So, just before we get started, I'd love for you to just chat a little bit about your background and kind of how you got involved in the crypto asset industry.

Joe David [00:00:40]:

Yeah, absolutely. So our story of how we got into crypto was more by luck than judgment, if I'm totally honest. So I've been running Nephos, which is our kind of traditional accounting firm, for about 1011 years now. We've always been focused on tech firms, startups, growing businesses, those bits and pieces. And we just happened to be working with a client and they basically said, look, my partner started this business. You're the perfect kind of accountancy firm for him because you're kind of young and fresh and you don't mind challenges and things like that. So go. And I've chat to him. So I'm like, yeah, cool. No worries. We got this meeting and I remember writing the notes and I was just like, what is this guy talking about? And he was kind of talking about ethereum and gas and this, that. And then I was just like, I have no idea. And I kind of at the time, this was about five years ago, maybe, and I kind of knew what crypto was in the high level of like, if I asked my mum what crypto was, she'd be like, Bitcoin, isn't it? Do you know what I mean? So I kind of knew that bit, right? That's all I knew. And so, yeah, going into this world of ethereum and things like that, I just didn't have a clue. But we were just so kind of keen to go, we want to do stuff that nobody else wants to do. So that gives us a huge edge if we can do it. So, yes, we took on the work. They knew we were learning on the job and the nice was they didn't have a huge amount of choice. So, yeah, we took on the work and the rest is history, as they say. But that's how we got into it.

Taylor Zork, CPA [00:02:26]:

I love it. That's pretty much exactly how I got into it. I was kind of focused on these niche industries. First it was cannabis because no one was really doing that. So I saw the opportunity there and when you're the only guy, you can kind of name your price. So that's the attractive part about this. And then same sort of situation. When I first got started in crypto, I was learning on the job and who I was working for was okay with that because it's like they didn't really have anyone else to go to. So kind of a nice advantage to have when you're the only guy in town doing it. So very cool.

Joe David [00:03:00]:

Yeah, 100%.

Taylor Zork, CPA [00:03:02]:

So I'd love for you to talk a little bit about the recent growth and expansion of mining you guys have had, because I've seen tons of partnership announcements and all those things and I know that in this industry specifically, it's a huge part of kind of the collaborative part of it is really important. So I'd love for you to talk a little bit about that.

Joe David [00:03:25]:

Yeah, absolutely. And as you say, the one thing I love so much about the crypto industry is that everybody wants to work with everybody. Nobody wants to kind of push you to one side and take everything for themselves.

Taylor Zork, CPA [00:03:41]:

Opposite of cannabis, like cannabis was the environment. No one wanted to talk to you. Everyone was like, oh, you're a suit, like, get out of here. What I love about crypto is that everyone's the exact opposite. Everyone's open door. Sorry to cut you there, but yeah, I love that.

Joe David [00:03:57]:

Yeah, that is interesting. And it does feel like and I mean this in a nice way, but it does feel like a lot of crypto owners know their boundaries, if you know what I mean. They know what they're good at and they know when to say, do you know what? I need something like this to help me. And I think the past year, as negative as it's been in terms of the things that have gone wrong with the industry, I think on the flip side, if you're an accountant or a professional advisor, it's probably been a good thing. I'd be a bit careful saying that, but you know what I mean? Because it's kind of shown that if you've got the right kind of support and guidance and whatnot with you, then you can hopefully prevent these things. But if you haven't got that and take SBF an example, right, clearly stolen money. But ultimately, if he had had better advisors, could he have made better decisions? Did he set up FTX on day one to swindle people out of money? Who knows? But if he did and maybe he just got into a hole and it got bigger and bigger because he didn't have the people around him to help him, right? So I'm not excusing it or saying any of it's, right, but I can see that then turning into a loose positive. People like us, we're able to say, look, we can help and support. So that's why we've kind of made sure we partner with the right people and the people that we feel that are going to add value to our clients or to our team, to the work we're doing, are they going to make us more efficient, more accurate for our clients, all these different bits and pieces. So, yeah, it's been a crazy, like 18 months, I would say, for us as a business. We started officially with Minor in 2021, at the start and we were kind of like, let's just throw a website together, see what happens, and whatever happens, happens type thing. Since then, we had as a group, we had eight staff in 21, and we've now got 26 today. So, yeah, it's been crazy growth. We've probably done around 800 tax returns for individuals in the UK, clearance investors, and we've got around 100 business clients now. So that's why we're now just making sure that the people that we work with, the people that we're part with, partnered with sorry, are people that are going to add value to everything around us, the ecosystem around us.

Taylor Zork, CPA [00:06:15]:

Yeah, I love that. And when people, all my family members, they know I've been involved with the space for a while, and they're like, oh, the crypto industry, how are you doing? They're like as if it's like, hey, checking in with me? And I'm like, Actually, this is a perfect time for me because as an accountant, the SBF, the FTX, whole debacle highlighted the need for our profession, right, and it cemented our need. And I think that it put a spotlight on the lack of help that there is in the industry. Because as you say, whether by design or just lack of resources, they didn't have an accounting department, they didn't have anyone in the accounting department in this $32 billion organization. So I'm sure that it was a combination of those two aspects, design and lack of help. But that still remains to be seen. So, yeah, I totally hear where you're coming from on that. Very cool. So what are your top three? Or maybe it's not three, but what are some of your best practices or the most important things for any accountant or finance pro to ensure they're doing the right things in this industry?

Joe David [00:07:24]:

I think the first thing is do your research. And I know that sounds obvious, but this is a space, more than, in my opinion, more than anything out there, that you need to know what you're talking about. You need to understand the fundamentals. And to be honest, that means you need to do it. You need to be putting money. You don't just need to buy Bitcoin and finance, you need to use MetaMask, you need to use a ledger, you need to move money around wallets, you need to understand gas, you need to be able to buy an NFT. And that doesn't mean one thing I say to a lot of people is if you were going to set up a coffee shop or something, or a pizza shop or whatever, you'd go around the competition, you'd try local coffee shop, see what there is, and that will cost you money. You just see that as like R and D type looking at what the competition is. So people, I think, are then scared to do that in crypto. They're scared to invest in crypto on the basis that what if I lose my money and it's kind of like, well, you would lose money by buying coffee and whatever in this, so why not do a similar allocate? I'm making £$1000, whatever as a kind of marketing spend and go and spend some money. Go and go enter a liquidity pool, understand the transaction flow. I remember a year or so ago, a bit more than that, entering a few liquidity pools on curve and I remember with the Ethereum gas fees as well because I think ethereum price was quite high at the time as well. I did it for like a week just to see what happens when I went in and when I came back out and the rewards and all those bits and pieces and I did it with the business to check on the business side as well, if you know what I mean. And I remember thinking, shit, I've actually lost like 50 quid on each trade here because the gas fee was so.

Taylor Zork, CPA [00:09:12]:

Bloody high, like $300 at times, like $500 for a swap on uniswap or something like that.

Joe David [00:09:18]:

The rewards are so low and I've still got like two curve tokens or something that I can't sell because if I try and sell them on uniswap, it's going to cost me like 20 quid so it's not really worth it. I think that's the key for me is one of the biggest things is like I say when I say do research, I don't just mean read books and listen to podcast stuff, which is also helpful. I mean go and do it, actually. Go ahead and go and practice what you preach. So that's the first thing. I think the second thing is, if you've done that part and you're already working with clients, acting on behalf of people is, again, understand how to track your blockchain transactions. Because a lot of people are like, if you were my client now, and I said, right, give me all your stuff, and you give me all the stuff, and then I go, oh, yeah, but can you tell me what it all means? Because I don't know what it means. The client then goes, what are you actually doing here? Why would I give you this zork when you're not even doing anything for us, the way we do it is we actually look through the blockchain, we try and reconcile transactions on behalf of clients before going to them with a list of queries. And that's the same thing we do in the traditional world, right? We get a bank statement, we get a load of invoices and we see if we can match the two together and if we can, great. If we can't, we'll then ask the client some queries. But in crypto, people just seem to immediately go back to the client with queries and it just doesn't build up a good rapport. So I think the other thing is learn how to be able to reconcile transactions, understand what's going on. I think that is also really important. And then, yeah, I think number three, I think, is a tough one. I think if you've done those two things, you're well on the way to being a decent accountant. But I think maybe the third one would be never think you know it all, never think that you've seen everything, because in this space, you never have. There's always another blockchain or another protocol or another platform or whatever that comes up that you think, yeah, I didn't know that one. And we've had that twice this week. We've had one client on internet computer protocol, which we knew about, we knew what it was, but we'd never worked on it before. And we've had another one on the wax blockchain, an NFC project on the wax blockchain, which again, we hadn't had a client on before. So luckily, with the wax form, one of the team has been actually quite into the crypto NFT gaming side of things. There's quite a big community there, so he'd already been into it with the ICP one. We just did a bit more research and we're able to kind of help out. So, again, I think everything, you know it all because you will then come unstuck. So kind of keep on top of your crypto CPD, as it were, which I guess could be where you guys come in, right?

Taylor Zork, CPA [00:12:17]:

Yeah, I think that you make some really good points there. I think one of the things that we include in part of our training programs is a section where we say, you have to go out and do this. And to your point, you see it as an investment in yourself and an investment in r and d like you're talking about. And I tell people, if you don't want to even spend that much, if you don't want to spend $1,000, you can hop on BSc finance smart chain if you have $10 and you can mess around on there, and it's an EVM chain. So when you're looking on BSc scan, the information is going to look almost exactly identical to ether scan, except ether scan is just going to have more detail and more clarity. So you can do this stuff even on kind of some of these other chains with less money and get yourself some experience. And then especially because the majority of people are going to be on EVM chains, at least at this point, and as to your point, they will be on other chains as well. But that's a really good baseline, and you're going to cover 80, 90% of your clients if you understand those ways to query data and follow the money. So they're the first two points that you make. And then, yeah, I always say as well, if someone says they know it all or seems like they know it all, they're either lying or they're ignorant. Right? That's why we created the crypto CFO community so that you can have people from all over the globe speaking to the UK, speaking to different chains that they're experts on, that maybe I'm not an expert on. I understand Bridging and I understand a lot of the EVM stuff, but I don't know about was it Wave Wax? So I don't see, I don't even know the name. But understanding how something works on an EVM chain and some other chains, you have a good baseline to start to develop an understanding of other chains as well. So, really great. So what would you say are the biggest challenges that you face as a firm operating this space? So whether it's hiring or education or whatever, what would you say those major challenges are for you guys?

Joe David [00:14:27]:

Yeah, I think hiring is the obvious one. Hiring accountants in the UK, obviously, I'm talking here, is I wouldn't say it's easy, but there's a lot of accountants and there's a lot of accounting firms, and it's not a big place. The US is a much bigger I.

Taylor Zork, CPA [00:14:48]:

Saw this recently, that the UK has the highest per capita accountants of any country. It's just an interesting little tidbit there.

Joe David [00:14:59]:

And that doesn't surprise me because there's a lot of accounting firms and there's obviously a lot of accountants that work in those firms. I don't think hiring an accountant in the UK is that difficult. But hiring a crypto accountant is another level, right? And not only if you then go, okay, I'm going to hire a crypto accountant. But again, who is that crypto accountant? What is their experience? Are they saying they're a crypto accountant on their LinkedIn profile because they've submitted one return and it's a good buzzword for them to put on there? Or are they somebody that's been in and out of everything and they know exactly what they're talking about? You've got no idea. So one thing that we've tried to do a little bit, and obviously we've got the benefit of having the other firm, if you like, where it has maybe more solid procedures because things are more traditional in the way they work and things like that. Do we bring on young, ambitious kind of people that want to learn and then we bring them into the Netflix side, the normal side, train them as an accountant or train them as a tax preparer or something like that, and then say, okay, now we're going to start introducing a bit of crypto into your work. Have a look at this one, see what we think and things like that. It is a huge challenge bringing people in. So I think what we're trying to do now is think of other ways to maintain the level of quality of the work that we're doing, but also still make sure that we can bring on those people in some way as well. So that's definitely a big one, I think, in a way as well. I think the other challenge is software. And I say that because whilst every single day I seem to get a message from somebody telling me they've got the greatest software that's ever existed in crypto, they still have two barriers and one is coverage and the other is price. So clients, quite often we pitch to a client at the moment who we're kind of on pause because we can't get an agreement on the software costs because the software costs are not far off our fees, which is ridiculous and we're not being cheap on this one either. Like this is a decent fee for us, it's a crazy situation that we're in. But again, they've got a closed market and not many people in it. And if you're good in that industry, you've got much more of a chance to stand out and therefore charge what we want. So yeah, I think software needs to kind of I know you guys use more like QuickBooks and Netsuites and stuff like that in the US. We use a lot of zero here in the UK and zero do like a 30 quid, 30 pound a month, like all you can eat type subscription. And I'm not saying that crypto should get exactly to that, but get into a more bulk, scalable accounting pricing model I think is definitely needed because that is a barrier for some clients who they have to pay us fees and our fees are more typically than a traditional business because of the nature of what we're doing. And then they've got to pay software fees on top, which can be significantly higher than traditional, it just adds up and puts them off and then makes them maybe think, I don't want to be compliant, I don't want to pay all these costs. I think that needs addressing. That's probably the second major challenge I think we have is getting software over the line and also the coverage that they support.

Taylor Zork, CPA [00:18:27]:

Yeah, I think to your point, I always say that cost basis is the holy grail of crypto accounting and that's still a major challenge with a lot of these. I mean, obviously it's garbage and garbage out, right? That's why we are accounting, that's why you hire accountants is to make sure that you reconcile those things. But I still haven't found something that really makes that process very easy and easy to train someone to do right, because I can reconcile cost basis myself, but that's because I had to figure it out when I'm running my own business and when you're training someone, there's a different level of motivation to get something done. So yeah, I think that's the biggest challenge that I see as well with these.

Joe David [00:19:10]:

Yeah, I totally agree. And the other thing is not just have you got the motivation to learn it, but you forget sometimes that somebody maybe doesn't also have the inclination, they might not want to yes, they're an employee of yours, but do they really want to go to that nitty gritty detail. They might be the most motivated employee in the world, but actually does their brain want to go there? Maybe not. So I think that's the other thing, and I was going to say the third point is education. And that's why I love chatting to you guys because what do we do with staff? We bring them on and we put them through the usual kind of training modules and then what do we do when it comes to training them on? One guy said to me yesterday, he was like, I wish it had like proper whatever software it was training when I started in January and I was like, well, there isn't anything we can give you a rundown of how we use it and whatnot and the things to look out for and things like that. But ultimately there is no book on how to do it. So that is definitely a challenge.

Taylor Zork, CPA [00:20:13]:

That's one thing that we're working on now is working on third party certifications for different softwares as well. So I think that that's going to be helpful as well because like you say, there's lots of different options out there and some of them have some training videos and things like that. But to have an actual CPA or an accounting professional giving you a walk through for how they use it practically in their everyday, I think is really key. So that's one of the things we're working on as well as part of our certification program. So, yeah, I think that could be helpful as well. Cool. So you just talked a little bit about this kind of standard, but could you dive a little bit deeper on some of the ways you guys are educating and leading your team to make a difference?

Joe David [00:21:00]:

Yeah, the moment, the main way we're doing it is the senior members of the team, the ones that have done the most amount of work and therefore on the ground, and also the people that have invested in the products and stuff and understand what's going on, they're kind of leading that training process. As a group of businesses, we've got three or four different arms to our business now and we have a weekly training session for staff. So we have an open hour on a Thursday or whatever it is, where we say the topic of the conversation this week is going to be X-Y-Z. So we do ask the software providers, we do ask partners that we work with that we know have got a good educational kind of platform and things like that to come and present to our team and give them some more thoughts to go away with. So we look at trying to do like say that weekly training hour to really give them the skills. But yeah, sometimes there's only so far you can go and sometimes we have to say what we did do. I don't know if you watch much of it in the UK, in the US, but there's a guy called Coinburo.

Taylor Zork, CPA [00:22:12]:

Yeah, I love Guy, I watch every single one of his videos every Monday I watch his recap and I love.

Joe David [00:22:19]:

Guy, he's a great guy. When people first started, when there was three or four videos of his, it was like Crypto Basics 101 or something like that, and a finance walkthrough or just some really kind of high level we'd literally just be like and that's the first day they'd come in and we'd be saying, Watch YouTube. And it's like, okay, this is different. But sometimes if you can pick some really solid if I said to you, we train our staff on YouTube immediately, you probably different because you understand that there's some value there. But people go, you trained your staff on YouTube and it's like yeah, but actually if you go out there and you find good content, which there is, you can get some really valuable kind of sessions from there. So we do things like that as well. In the early days, he breaks down.

Taylor Zork, CPA [00:23:12]:

Staking and things like that.

Joe David [00:23:14]:

Super.

Taylor Zork, CPA [00:23:14]:

Well, he does really good technical walkthroughs. I think that that's a great way, that's how I had to learn and I'm sure you had to do the same when you're first getting started because there's nowhere to learn this stuff formally. So YouTube is a great place to learn things and I think that our generation, I think, is the start of that. I think that if you told a boomer that they'd be like, what are we doing? This isn't professional or whatever, but that's how you I mean, it's an emerging industry, you kind of have to take what you got. And honestly, I'm very weary about recommending YouTubers to anyone, especially in the crypto, only really in the crypto industry, but he's like for family members that are looking to learn about the space. He's the only one I recommend because he doesn't do advertisements or things like that. He's not like Shilling or at least he's transparent about the projects that he owns.

Joe David [00:24:10]:

Yeah, I agree. Sometimes I don't 100% agree with him. Sometimes I think sometimes there are things he says that I'm not sure I agree with, but like you say, he is transparent and you can see on his weekly newsletter and things like that what he's holding and whatnot and he tells you about what he's moved and things like that. So yeah, I think he's as good as any out there from a learning perspective anyway. Cool.

Taylor Zork, CPA [00:24:38]:

I have one more question for you, just because this is my own professional curiosity, so I just came across Reflection Tokens. Have you heard of Reflection tokens?

Joe David [00:24:50]:

Yeah, it was like a co founder of one this time last year. Yeah, I don't know what go on.

Taylor Zork, CPA [00:25:01]:

It's an interesting topic and I just didn't know if you had any insights on it from what I understand, it's essentially like you have essentially a tax on any transactional volume that's moving that gets redistributed. But the thing that I never understood is how you can have that redistributed to wallets without the on chain aspect of it because it seems like the wallet balances just update automatically without the token seeming like they move on chain.

Joe David [00:25:33]:

Yeah. So the ones that I've there's a few that I've kind of selected. A friend of mine about a year ago, a friend of mine was like, you need to get into this because I'm part of the team and it's going well. And it's always one of those things where people always tell you that little bit too late, you know? So so I kind of went into it and I was like because the tax, like you say, they do call it a tax but tax is kind of the wrong word because then people get confused because someone's actually come to me before and been, oh yeah, but they've taken tax off me already. And I'm like, no they haven't. That's like a fee. It's a fee really? You want anything right? And you're right. They get some of it goes into a marketing part, some of it goes into whatever part and then the rest goes to the holder. So I think it depends on the some tokens. You send them to a smart contract if you like, and the smart contract is then updating effectively in the background and then it's kind of like staking. And then when you withdraw it, that's when you'll kind of see the rewards come back into your wallet. Others do it directly on the wallet. So I think it depends on the product as to how the one that my friend was working on, it was like, say, a staking product, if you like, where you sent your holding to this wallet, and then your reflections, if you want to call it that, would come into that smart contract. And then when you withdrew it, you just have a bigger balance than when you started. Yeah.

Taylor Zork, CPA [00:26:58]:

Seems like a nightmare to reconcile. I'm just digging into it right now and I'm like because this one, there's no smart contract. It's just if you're a hodler, you get your reflection on every single transaction and I'm just thinking about like, okay, treasury wallets, how the hell am I going to reconcile this at month end? And this is what we say, you can never really know everything because tomorrow there's going to be a new use case and a new token type that. This is what I love about the industry. You're constantly putting on your accounting hat and your theory hat and you're saying, okay, what does this most look like? And business partner, my business partner Brian was like, okay, this kind of feels like a stock split in a way. So it's interesting.

Joe David [00:27:47]:

And you've hit the nail on the head there, right. If. You don't know what you're doing. That's not where I would if you haven't seen this particular thing before, and you say, Right, how am I supposed to handle this? Like you just said, go back to basics, to fundamentals. What is it, what is the fundamental underlying transaction that's happening here? And that's where in the UK, we've got VAT and we talk quite a lot about VAT for crypto businesses and NFT projects, things like that. And again, there's no direct specific guidance. There is a little bit on certain bits, but not on everything, obviously. So, again, fundamentally, what you're doing, if you've got an NFT project that is selling a membership to a club, for example, and that would normally be a VATable supply in the UK if it was sold via Fiat rather than NFT, right? Then the chances are it's going to be a VATable supply in a crypto world as well, right? Whereas derivatives trading, for example, is not a VATable supply in the UK. Therefore, if you've just signed up to a platform, or you are a platform that's doing derivatives trading, chances are you're not going to be a VATable business. So a lot of it, like you say, is breaking it down to the fundamental business model, what they're trying to achieve, and then applying standard accounting rules to that. And you'll get somewhere anyway, even if it's not perfect, it'll get you somewhere nearer to the truth.

Taylor Zork, CPA [00:29:05]:

Yeah, I mean, ignore the that's what I say to everyone when they're first learning this. Ignore that. Pretend this isn't crypto. Pretend this is just some transaction that you're seeing happen and then let's analyze that and see, what does this look like, what does it smell like? So, yeah, I love it. Cool. Well, I know it's late on a Friday over there, so I want to let you respect your time. Joe, I really appreciate you joining us and talking with me for a little while and really respect what you're doing over there. So I'm glad to be connected and.

Joe David [00:29:36]:

Yeah, lows, mate, thanks for having me. And, yeah, we we love you guys and what you're doing and we hope to help collaborate and support you guys as much as we can in the future as well. So, yeah, speak to you soon and have a good weekend, mate.