Mackenzie Patel: [00:00:00] We are Hash Basis, your crypto-native accounting firm, which is our tagline. I love it. But we're helping companies with their crypto accounting and bookkeeping and also helping them get set up onto Subledgers like Bitwave, for example. And also we're doing individual crypto tax as well, which does also involve a subledger. So we're kind of doing both of those right now, just kind of seeing what the market is out there, what's the demand for that? But I do eventually see us specializing more in business crypto accounting, like more enterprise level because I love US GAAP. I think it's awesome, and I really just want to implement subledgers and help clients get their books in order.

Speaker2: [00:00:35] Welcome to Crypto With Accountants, CWA, powered by Bitwave, where we talk with technologists and crypto enthusiasts as we discuss current events in economy, politics, technology, and digital assets with thought leaders from around the world, hosted by Pat White and Rafael Casas. Today, we have a fantastic guest and our dear friend, Mackenzie Patel, CPA. Mackenzie is a CPA and the CEO of Hash Basis, a crypto-native accounting firm. Her list of accolades go on and on. It's really, really interesting background. But she and her business partner, Cortney, started Hash Basis to share their crypto accounting and tax expertise with the blockchain industry. She also does accounting for DIY org and the first DAO to be incorporated as an LLC in the US. Mackenzie is based in San Francisco and loves hiking around Angel Island. Definitely want to know more about that. But Mackenzie, thanks so much for joining us. We're super honored to have you here.

Mackenzie Patel: [00:01:28] Of course. Thanks for having me on. I'm really stoked to be here. As you know, I love talking about crypto accounting. It's like my favorite thing. So thanks for having me on.

Speaker3: [00:01:35] Hiking Angel Island is awesome, actually. I didn't realize that that was part of your bio, but Angel Island is spectacular. It's such an underappreciated little part of the bay here. Well, Mackenzie, thank you so much for joining us today. I'm so excited to chat. So why don't we start off just tell us a little about your background. I mean, what got you into accounting, and then we'll parlay that into what got you into crypto accounting?

Mackenzie Patel: [00:01:58] Sure. Yeah. So don't really have a super exciting story about how I got into accounting. I mean, you don't grow up and you're like, Oh, I want to be like an accountant when I'm older. I wasn't saying that, like, I wanted to be a chef or an architect.

Speaker3: [00:02:10] Sure you do. I wanted to be a paleontologist. So see how well that went.

Mackenzie Patel: [00:02:17] Well, there might be some parallels there. But yeah, I definitely did not expect to land in accounting at all. I'm actually starting University of Florida. This is actually back in 2015. And I started doing electrical engineering. Now, when I say started, I was actually-

Speaker3: [00:02:29] Did you start as an engineer?

Mackenzie Patel: [00:02:30] Yeah, but I started Summer B. So it wasn't even like I switched right after Summer B into accounting. So I really didn't take any engineering classes, I just went in technically in that.

Speaker3: [00:02:41] Oh, it's funny because I actually say that accounting and engineering have a lot of things in common. The things that always stand out to me, and we said this on one of the earlier podcast, but like both engineers and good accountants have a very highly tuned sense of what to be OCD about and what not to be OCD about. There's this really interesting thing there of like engineers themselves have this level of materiality with which we approach problems. Like at some point, getting to sub-millisecond timing on something is the phrase, the juice isn't worth the squeeze. And that's the same thing with accounting. Like at some point, you're $100 off and you could spend a week trying to figure that out or you could literally call it a material move on with your life. And I always I always find that relationship. But then on the big stuff, you have to be incredibly OCD, incredibly process driven, incredibly resilient about everything you're working on. So I always find a lot of overlap between those two.

Mackenzie Patel: [00:03:31] Yeah, I completely do this as well. I think you use the same parts of your brain for both accounting and engineering. And so my whole thing was that I didn't want to program at all. But I did, it's called FLVS, Florida Virtual School and High School, and I did SC programming. And I hated it because it was all online. I learned nothing. And so when I went to college, I was like, if anything, I don't want to program. Now, fast forward a few years later, I was programing on Codecademy. And so I was like, I could have been a developer. But anyway, so I switched to accounting because my sister's boyfriend at the time, now husband, was doing accounting also at University of Florida. So I was like, "We get along." If he likes accounting, maybe I'll like accounting. And so then I just switched. And then freshman year, and then from there, I just did it the rest of college.

Speaker3: [00:04:09] Actually, I don't, I often talk to people about this and this is like, did you immediately love accounting? So let me sort of put this in context. The 101-level classes for computer science are washout classes. When I took it, it was C, which... I mean, it's not that it's like the world's hardest language, but it is a very difficult language to program in if you've never programmed before. So the 101 level for computer science at SC was incredibly washout. I mean, it was like 40% people would wash out. But 102 was a little bit better. And then the rest of the classes were just normal classes. Is accounting kind of like that? Do they try to wash you out, like make you do... Give you the green visor and these enormous books and make you balance like 10,000 transactions? Or like is it actually a pretty friendly course?

Mackenzie Patel: [00:04:53] No, I wouldn't say it was friendly at all. The first class with financial accounting and reporting, so for one. And yeah, it was definitely... Like we called it a weed-out class, like a ton of people just failed it. So actually that was my first exposure to accounting. And I loved it. I was like, "This is great." Well, I didn't really understand debits and credits at first. I was like, credit card, debit card. That's what I was thinking. And then one day I was like, "Wait, these are arbitrary. This doesn't mean anything." And then that's the point at which I kind of understood accounting.

Speaker3: [00:05:19] I think every accountant goes through that point where they realize that debits and credits are arbitrary and that everything in the world starts making more sense.

Mackenzie Patel: [00:05:27] That's basically what happened to me. Yeah. So I just loved it kind of right from the beginning. And then especially like in later on and then also in masters, when I did that program, it just got really fascinating. Because I love mergers and acquisitions class. That was great. Like our tax research class. I loved all the IT auditing. So I kind of found my home.

Speaker3: [00:05:47] I never thought about it. Of course, there's a mergers and acquisition class. You got exposed to intangible assets very early on in your accounting career which will then deal with your later life getting into crypto.

Mackenzie Patel: [00:05:57] Yeah. And think it got really lucky because my IT auditing professor we had, it was literally 1 or 2 classes about blockchain. He introduced the concept to us.

Speaker3: [00:06:06] No, seriously.

Mackenzie Patel: [00:06:06] Yeah. This was back in like probably 2018 or 2019, and he gave us an overview of what blockchain was and then actually had a class project. And now that I'm thinking about it, it's actually really like for thinking of him, it was like what do you think crypto assets should be classified as? So I was like, Is it intangible? Is it inventory? Is it some kind of financial instrument? And so I was doing this back in like 2019, but I didn't really think about it. I was like, This is cool, but this is never going to apply to me. I didn't love crypto.

Speaker3: [00:06:33] Interesting. It's funny because in retrospect, it's incredibly obvious. But actually, yeah, in computer science, there are blockchain courses everywhere. But it never actually occurred to me that there would be blockchain courses in accounting. But of course there would be. It's the new hotness for accounting. So you obviously knew what Deloitte had said at that point. What did you come up with in your analysis of digital assets?

Mackenzie Patel: [00:06:55] Oh, that's a great question.

Speaker3: [00:06:57] Asking if you remember a class from five years ago or whatever.

Mackenzie Patel: [00:07:00] Right. I think I might have put inventory or something like that because something about like what level tracking. I made a whole PowerPoint, I should look it back up, but I think I either put inventory or intangibles. So yeah, that was a fun time. But it wasn't a full course on blockchain accounting, it was just like two individual class sessions on it. But that was the only exposure that I got.

Speaker3: [00:07:21] Amazing. Okay. So you did that. You did the master's program there. So you came out of college with your CPA. I guess you still have to do a little bit of work after that with the CPA, right?

Mackenzie Patel: [00:07:30] Luckily, I was able to take a lot of courses, like the actual exams in college, but then COVID happened, so then a few of my exams were canceled. So then I ended up getting it or like finishing the exams, I think in June, after I graduated, so June 2020. But it was pretty much like all around the same time.

Speaker3: [00:07:45] I know we're going into this. This is just sort of a funny thing because I'm actually learning right now. I hear the CPA tests are pretty hard. Are they pretty hard?

Mackenzie Patel: [00:07:54] I think some are more challenging than others. Like the financial accounting one was... I actually really like that one, but I think it is quite challenging. And then the regs class or the regulations, which is a tax one, that was definitely the hardest one for me. But then there was like the auditing ones-

Speaker3: [00:08:08] Is that a regional? Is it federal regs or it's like you take a CPA course in Florida, so you have to know Florida and federal or it's all federal regulations?

Mackenzie Patel: [00:08:17] Yeah, it was all federal, which was good. So it's not like the bar where you have to do like a state-specific course.

Speaker3: [00:08:22] Yeah, the regional. Yeah, yeah.

Mackenzie Patel: [00:08:24] No. CPAs, we don't deal with that. It was just federal, thankfully.

Speaker3: [00:08:29] But it is like the bar because you take an ethics test, right?

Mackenzie Patel: [00:08:32] No, I'm from Florida. So we didn't have to do ethics.

Speaker2: [00:08:36] That's hillarious.

Mackenzie Patel: [00:08:36] There was no such component.

Speaker3: [00:08:39] Far be it for me to laugh at Florida because half our sales team is from Florida. So we are friends with Florida. But that is pretty funny.

Speaker2: [00:08:47] We're having a lot of discussions as of recent with the barrier of entry for CPAs and then as well as the 150 rule, things of that like... So there's been a lot of arguments and discussion because of the lack of talent coming into the space.

Speaker3: [00:09:03] The shortage. Yeah. I don't know if you remember this, like out of your graduating class, did everyone become a CPA or did you even have more washout as it got to tests and making sure you got your hours and all of that?

Mackenzie Patel: [00:09:16] Well, once it got to like the master's program, I think most people... Because all my classmates just think Big Four. I was one of the only few that did not do the Big Four route. And so I kind of felt FOMO, like my super senior year. I was like, "I'm not doing Big Four." But then I got over that.

Speaker3: [00:09:29] That's so interesting to me. Why did they want Big Four? Why was that so important?

Mackenzie Patel: [00:09:33] Well, because that's who caters to these big universities. So like Deloitte, EY, PwC, they would all come to our accounting building and give us free Chick-fil-A, like all this swag, they take us out. So they caught you. And that's kind of how it works. And so I think as a student, you're really wooed by that. And so I interned at Deloitte for literally three summers, and I did not enjoy it for three summers and was like, "At the end of this, I can't do this. I need to do [crosstalk]."

Speaker3: [00:09:56] When you're an intern at Deloitte, do they work you as hard as when you're a first-year associate? Because a first-year associate-.

Mackenzie Patel: [00:10:01] No, definetely.

Speaker3: [00:10:02] ... 180 hours. I mean, you have 2000 hours you need to build all that kind of stuff. When you're an intern there, you're just cruising along, eating chips, drinking free soda.

Mackenzie Patel: [00:10:11] Basically. Yeah. I was an intern in Atlanta all three summers. And so there was a lot of happy hours, a lot of going to breweries. I did drive to a lot of client sites and stuff, but it definitely was not as intense as my friends that did eventually become first years full time.

Speaker3: [00:10:24] So was Figment your first job out of college then?

Mackenzie Patel: [00:10:28] No. So I actually worked at Honeywell first. Yeah, they called it the Future... Oh, I'm forgetting the name. Future Finance Leaders program. And so yeah, I actually interned my last summer in college. So I did three summers at Deloitte and then one summer at Honeywell out in Phenix. And so I was part of their accounting group for Aerospace out in Phenix. I was living in Scottsdale at the time.

Speaker3: [00:10:49] That's got to be interesting. That's an incredibly difficult accounting from a totally different perspective in terms of job billing, incredibly complex supply chains. That's actually really, really interesting accounting, also to crypto, which is incredibly interesting accounting.

Mackenzie Patel: [00:11:04] Yeah. I wasn't doing a lot of the supply chain stuff, I was doing revenue accounting mostly, which is interesting because that's why I ended up doing it. So I'm very much been in this revenue role for the last few years now. And so I just learned a lot about just general accounting. Because in school, you learn a lot about the basics, but you don't fully really apply them. And so it's like, how do I actually enter a journal entry into SAP? I just learned foundational skills like that. And so it was great. Phoenix was just super hot, lots of dessert things, but actually, I enjoyed that. So it was probably not.

Speaker3: [00:11:33] So you actually mentioned something very interesting. So I've noticed that a lot of our clients do actually have someone who specializes in revenue accounting, which is really... That's actually interesting to me. I'm not sure I would have expected that going forward. But you think about the open seas of the world, like Figment obviously, the crypto revenue is by far one of the hardest parts. It's the highest volume component. Is it that dramatically different a skill? Talk me through like if someone's listening to this and they're like, "Oh, I like revenue accounting," talk me through what are the skill set differences and how to think about that role?

Mackenzie Patel: [00:12:08] Yeah, I guess just think big picture. Just revenue in general is just an item that auditors really dial into. And there's been a lot of time looking at that, obviously, but especially even more so in crypto revenue I found, because it's just very hard to verify crypto revenue a lot of the time. And so I think a really good skill set is just being very detail oriented. I know you mentioned the materiality part, which obviously makes sense for accounting, but I almost try to not think about the materiality. I pretend the materiality is like zero. And so I actually try to be as detailed as I can, especially in something like crypto, because auditors are going to be looking if they're going to be tracing back to the transaction level and be like, "Was this revenue real or not? Do you actually own these tokens?" And so I think that's probably the biggest part. And also the new guidance was not new. I think it's been out for quite a while now. But that five-step process for recognizing revenue, especially in crypto, each one of those line items or steps I think is just a can of worms. And you can be like, well, you can view it this way or you can view it this way. And so there's just a lot of subjectivity in that, which is why I think you have specialized revenue accountants and why the role tends to be more challenging.

Speaker3: [00:13:09] And it's interesting because, I mean, essentially you're a specialized crypto revenue accountant. We talk about this a lot. When we're talking in general about crypto, I often say it's interesting that there's still an expectation that anyone can do crypto accounting. Because if you go to a really complex real estate shop, they're not just hiring kids off the street that have a CPA to do really complex building-level depreciation accounting for your various revenue streams off of it, all that kind of stuff. You have people who focus on real estate accounting, people who focus on depreciation accounting. We're now seeing the emergence of the specialization of crypto accounting as a specialization. Do you see that as well from your side?

Mackenzie Patel: [00:13:51] Yeah, 100%. And I really like that analogy you use, like you have to understand real estate to be a good real estate accountant. I think it's the same thing with crypto. If you don't understand how blockchains work on a fundamental level, then I think your job as a crypto accountant just gets ten times harder. Because you really need that foundational knowledge, maybe even some programing knowledge too, because you might be reading contract logs or something. So yeah, I definitely see the field emerging, and I don't think anyone can just be a crypto accountant. I think you actually have to put in the time to research it and understand the field and the industry. And then you just kind of layer accounting on top.

Speaker3: [00:14:21] Well, it's a good point because there's this aspect of expectation versus reality where the way that blockchain has been pitched is like, "Hey, everything just works. It's all magic. It's just on the blockchain. It'll just all work." When you get to any of these places and you realize the reality of it is that nothing really just works. It's incredibly complicated. There's incredible depth of complexity around any given transaction. None of the exchanges have good APIs. All the exchanges are custodians you're working with have to have pretty iffy APIs, even in the best of cases. That you're then using as this is not JPMorgan that has a 30-year-old API that's been hardened by decades. This is a startup that honestly an API is like the third or fourth thing on their list of priorities or 15th or 20th. So even just the diligence to actually get to accuracy is very difficult.

Mackenzie Patel: [00:15:10] Yeah. Think it's funny because you think it would be so seamless. And people come up to me like, "Oh, is your job just easier now because everything is all in the blockchain?" And it's like, "No, my job is definitely ten times harder than just my job doing normal accounting." Because every single step of the way, I feel like I have to research something new that comes up or, as you said, something breaks, and so you have to go in and do some investigation into that. And so maybe in like 10, 15 years as the industry matures. And I definitely think it is maturing. I've had a lot of demos of new crypto accounting tools before, and they've really come a long way even since like a year ago. And so I think we will eventually get to that end state, but we're just kind of in this awkward growing pains phase where it's just kind of painful.

Speaker3: [00:15:48] Yeah, I think it'll be interesting to see. I mean, even, we think about that, we have a lot in terms of like, when do we hit that inflection point of that this goes from being harder to being easier. The new FASB guidance will certainly help with that in some ways to sort of get rid of some of the more complexity around some of the stuff. Although even the new FASB guidance doesn't get rid of impairment, it just limits what's getting impaired. So like we're going through this phase of like more complexity before we get to less complexity, actually, which is super interesting. But then also, I mean, the other thing is like a lot of stuff has to be... There's going to have to be more on-chain support for stuff. So things like Request Network is working on some cool stuff. Like as more of the actual blockchain stuff gets on chain, you end up in a cool situation where it's easier for the accounting tools to actually deal with it because there's more information on chain. And that's a big part of all this stuff.

Mackenzie Patel: [00:16:37] Yeah, it's funny, [inaudible] Request. I had call with him earlier today where we were getting a demo. And they're one of those products where I think they've done a really fantastic job growing in the last year or two. And so I think it's really cool. They have their invoices that are on chain, but they showed me this expense feature where you can take a picture of a receipt and then it links to an invoice that you send out. And like, that'd be so cool. That picture of your receipt is an NFT that now lives on chain and then you have auditable support that goes back to the receipt level. And so yeah, I totally agree. I think we'll get there.

Speaker3: [00:17:04] Yeah, and that's a big part because that obviously would never work on an L1, but then the idea is like now that we have these really cheap L2s, L3s. Because you don't want a picture of your receipt on a public blockchain, you want to encrypt it on an L3, and that you can then give really specific access to your auditors around. So there's stuff coming down the pike that's going to change the world here. But it's still interesting to see what happens. We're not there yet, we're still figuring it out. And honestly, there's still a lot of pushback. That's the tough part about this is like when you get as much pushback as you get from the government right now, you do end up in this space where that does kind of slow down innovation a little bit because suddenly everyone's not quite totally sure how much they should really be pushing on this if the government is going to try to make it illegal or whatever from that perspective.

Mackenzie Patel: [00:17:49] Yeah, I heard somebody say one time that this environment is very uncertain because there's lack of regulation and lack of clarity, but there's still enforcement. And so that really scares people. And I'm like, Yeah, I can definitely understand that.

Speaker3: [00:18:00] Yeah, which is the absolute worst place to be for an industry like this. That's why we all get so bummed about American's place in this because it's like we are the financial services leader in the world, we should be leading on crypto and yet we're doing so much to fight that. It's really tough. Okay. So you spent time at Honeywell and then Figment.

Mackenzie Patel: [00:18:20] Well, there was a little bit of an interlude. Not really an interlude, just something that I did on my way to becoming a crypto accountant. So whilst at Honeywell, I just got really into crypto. So one of my really good friends, he was actually working at Makerdao at the time he had interned there, just like really into Defi. And we just were chatting about it a lot. And so I was telling him that I want to do something more cool with my accounting degree at some point, not just do normal revenue accounting. And so yeah, he's the one that really got me into crypto. And this must have been like October of 2019, I think.

Speaker3: [00:18:49] So what was it that hooked you? What was it?

Mackenzie Patel: [00:18:53] It sounds kind of basic, but I was like, "Oh, like blockchains are ledgers. I'm an accountant, I get ledgers." And so it was something that was like blockchain seems so technical to me, but then there was just this fundamental piece. I was like, "Wait, I just kind of intuitively understand this." And to me, that was actually quite powerful. And I just like all the Degen aspects as well, I'm just like, "Oh, there's no TS, This is cool. This is kind of edgy." And so yeah, I just started researching it a lot on my own. And then throughout this process, I also started doing some programing on Codecademy on the side. So like Java basics, Python basics. And I actually had this thing called Codecademy chapters where you could launch a virtual chapter around any topic that you wanted. So then I launched Phoenix Crypto, which is just a virtual community dedicated to teaching people all about crypto. So then I was researching things on the side like how do you simulate a blockchain in Python, what does the merge mean on Ethereum? And then I was giving these presentations out to just random people on the internet. And so I was able to just learn a lot that way because I was basically forcing myself to learn by teaching others. And I think that was really instrumental in me understanding crypto.

Speaker3: [00:19:57] Amazing. So then what made you finally decide to take the dive?

Mackenzie Patel: [00:20:01] I think I knew I was ready. I've been doing Phoenix crypto for about 7 or 8 months and I just wanted to actually apply that knowledge in an actual job. And that summer, I was actually in San Francisco. And I think just being in San Francisco obviously, it's such a startup tech sort of scene. And I just felt like I wanted to do something in the technology industry and I was like, okay, like it's now or never, it's time. So then, yeah, that summer I did it.

Speaker2: [00:20:26] You made a really interesting point and I've heard you talk about this before. Because we have a lot of accounts that are on the cusp or interested in maybe getting in the space a bit more. And you just made a good point about the fundamentals, just understanding. And I've heard you talk about this a little bit before, but for some of those accountants that are listening to us and looking to make the... You talked about cash basis and on chain transactions and accrual and the differences there. And I'd like to see if you want to kind of talk high level on that, that could be I think a really good one on one for some people just going to understand and looking to get in this space because we have a lot of accountants that we talk to and see that are just trying to understand what this looks like.

Mackenzie Patel: [00:21:07] Yeah, definitely. I guess on the crypto side, like putting crypto accounting side for a second, I think it's important to understand kind of like the first principles, the basics of crypto, like why do we even have this? Crypto is supposed to be a better system for transacting on the Internet. That's what it's supposed to be. And so I often just try to remind myself that because sometimes it can seem like, oh, what is this NFT project doing, what is this new network doing? It can all seem very nebulous, but at least for me, sometimes I just reread the Bitcoin whitepaper and I'm like, "This is why we're here, like peer-to-peer payments that are just supposed to be fast, instantaneous and anonymous or pseudonymous." So that's kind of the first part. But then now switching over to the crypto accounting piece. Yeah, I think the cash basis part is very important to understand, especially from an accounting perspective. So accountants know cash basis, accrual basis, different ways you can report your books under, but blockchains are just inherently cash basis because you're sending tokens, you're receiving tokens. And that's what the ledger sees. It doesn't know, Oh, I just performed some services. So technically, I'm owed a payment. It doesn't know that only knows when I've actually been paid by somebody. And so for me, that was kind of like a big, I guess, reconciling item in my head. I'm like, how is crypto actually working? Oh, it's literally just it sends tokens and receives tokens or tokens doing something. And it happens whenever that timestamp says that has happened. And so I think that's just the gap between what US GAAP or accrual-based books are supposed to be and then what's happening on chain. And that's where a lot of my job... A lot of my work that I do is just trying to always reconcile those two. And so I think the product that can actually close that gap and just make blockchains understand accrual basis accounting and that's going to be like the ultimate product. I don't know if we'll get there because that's not the nature of blockchain.

Speaker3: [00:22:50] Well, it's so interesting to mention that because that is it's one of the gaps, like when people say, hey, like, is this making your job easier? It's like, well, no, because all the normal stuff is there. It's just a slightly more efficient bank account, but then with some detrimental pieces versus an actual bank account. And when it's a lot of the stuff that we want to get to is the idea of like it's bigger interchange problems. Now of course, what's interesting about that is interchange for things like invoices has existed for a long time, but you always are in this really tough situation of fitting in with somebody's model that maybe you don't like. Maybe someone uses Workday, the other person uses SAP, you're trying to do an interchange and it's just not working exactly right. Getting to the blockchain is really this story of... Blockchain in general is good for how do people who don't trust each other work together. That fits really nicely into something like agreeing on an invoice. An invoice gets created on the blockchain, both sides agree on it. Request Network is doing really, really cool stuff here. We think they are doing some really interesting stuff around this. We partner with them. They'll be at EDAS booth as... I think they're going to be on one of the payments panels and then they'll also have a booth there. So we think that that's a major part to really actually streamlining a lot of this stuff. And the other side would be like getting more metadata on the blockchain also kind of does it there for sure.

Mackenzie Patel: [00:24:04] Yeah. One quick note, on the payment side, I definitely agree that it is getting a lot better, but I still think like having crypto or blockchain in the middle kind of does add a few extra steps. Like let's say I send an invoice to somebody. So okay, great. Now I have to tell my ERP, okay, this is accounts receivable book the revenue and then to wait for the payment to come in. And let's say I see the payment on Bitwave or something. Then I'm like, okay, this payment comes in. Now I have to go ahead and close it on the ERP side. And the transaction does sync, which is good, but at least there's also a reclass entry that needs to happen. So you put it in the right digital asset account. And so I have found that there's a few extra steps. It's easier to reconcile because I can point to an on-chain transaction like, okay, this actually happened, I actually didn't get paid. But on the accountant side, there's just a few other things you have to do to fully close the transaction. So we're getting there.

Speaker3: [00:24:47] Yeah. No, it still is a project. I mean, there's still a lot of complexity there too. But I think where it's going to change would be once we start to see... Because honestly,where we don't want to be with crypto in my world, and I'd love to hear your thoughts on this is like we don't want to be... There's an example, I think it's been debunked, but I still like using it, of when one of the first cars came out, they put a stuffed horse's head on the front of the car to like A, make people more comfortable with the car, and B, make the other horses that were still on the road comfortable with the car. So is this idea of like taking this new technology but just sort of using it like old technology? And we're kind of in that phase of crypto right now, which is like, yeah, if you're trying to replace your current ARAP ACH process by itself, just take that really narrow slice of clicking the yes button on ACH, and you're trying to place that with crypto, which a lot of the payment projects are doing right now. You're basically saying, hey, we have this enormous awesome technology that is really a groundbreaking new financial system and automation. But what we're going to use it for is just replacing this little tiny, narrow slice. I'm not sure that that's where you get the benefit. The benefit is when you start to codify actual contracts. You basically say, hey, I mean, how many times have people ignored their net 30 terms? Because at the end of the day, it's kind of a pain in the ass to do it. These are people you have to deal with every single day. You don't really want to be too confrontational. How often do you really worry about that? But if you could enforce that, the smart contract level either like a net 15 bonus for pain or a net 30 plus penalty for not paying, suddenly you actually have self-enforcement of things like your net payment terms and you can add more stuff like that in terms of streaming payroll or streaming invoices, better use of the funds while they're sitting in this escrow. So you even have this thing that like... You can start to change the way you think about payment terms where you have to deposit the payment on the first, but we don't actually have access till the 15th. And you have like more and then it's accruing interest or something in that interstitial period. What I get really excited about around payments is when we're not just paying between two people and replacing ACH.

Mackenzie Patel: [00:26:55] Yeah, it does feel... I think the term is skeuomorphic. I think you're still kind of in that phase where we're just trying to replace everything that was in Web2, just give it the web3 version of it. So yeah, I definitely still agree. But I think this, especially in payments, there's a lot of opportunity there, like Superfluid for example, and the streaming payments, I'm like, why has not everyone just adopted streaming payments yet? I mean, I'm sure there's good reasons why, the infrastructure might not be like fully ready yet, but things like that, I'm just like, yeah, we need to [crosstalk].

Speaker3: [00:27:21] It's a great question though, that I tend to think about because like you are... It's ultimately a business discussion. Why everyone hasn't picked up streaming payments is ultimately like, well, what's the business reason for streaming? There's a lot of reasons not to do it. If you're doing streaming payroll, it is incredibly difficult to do the accounting for that. Because you essentially are going to do a... You do a drawdown on a salary that you then satisfy at the end of the month. Or you do day-by-day req. But even that's kind of a nightmare. So streaming payroll is obviously very complicated. Streaming invoices are complicated. So the question just ultimately has to come down to the business, which is like, why does the business want streaming? And honestly, I kind of come out of this like I'm not sure... We'll see. I love the streaming use case. I'm not sure we're going to see streaming payments for individuals. I actually think it's a lot more likely we'll see it for businesses. But actually, that reminds me. So Mackenzie, why don't you explain what streaming payroll and streaming payments are and then we can kind of get into some of the interesting use cases for those?

Mackenzie Patel: [00:28:24] Yeah, definitely. So I think you set up a smart contract first and basically the payments that you're sending to like a contractor, for example, it's kind of in the name. They just kind of slowly leak out or send out to this other person's address. And so instead of having to wait for your paycheck at the end of the month, you can just receive payments every hour, every day or I think whatever the cadence is that you set up. And so it's better for the person receiving payments because they can actually have access to their funds right away. They don't have to wait and nothing's uncertain about it. But definitely agree on the accounting and tax side. I just was thinking, how do you withhold taxes on a streaming payment? That sounds very complicated. [crosstalk].

Speaker3: [00:28:58] Yeah, when we have folks doing it, we basically do it as a draw in particular for withholding employee payroll. Because you basically do it as a draw that just satisfies over the course of a month. Where you get really interesting there is then you start to see there are really interesting things that come out of that. So essentially, if I set up a streaming payment for you, so let's say we do some services and I'm going to pay you 100 ETH over the course of a month. And I do that as streaming. I mean, essentially it is a, depending on what month you do it, it averages out to a net 15 payment. And so the question is like it averages out to a net 15 payment, but with earlier access to some funds and collateralized-able access to the full amount, that's what becomes really interesting here. So it's like we have to go to the second derivative of use cases here, which is like, okay, if I just do net 15 on the 15th day of the month, I finally get a payment. That's great. But if I am sitting on the full amount is in a smart contract and I am slowly getting it on a day-by-day basis, A, I have earlier access to cash as the payee, but B, on the other side is that I actually, as the payer, I am able to earn interest on the amount past the 15th. So there are real reasons to actually want to kind of sit on it. And I now have a record of my payments. I could potentially use some of that as... If I'm the payee. I could use it as collateral. I can say, "Hey, this contract is mine. You can see exactly how much there is in this month." I could borrow against it a month out and that could be enforced on chain as opposed to through contracts, through factoring and things like that. So I don't know. It has to ultimately be driven by something of the business wants, not just by how cool the technology is.

Mackenzie Patel: [00:30:47] Right. One thing that just came to mind, like from the payers perspective, the person actually sending the money, then you just have a constant stream of gains and losses as well. So I'm just wondering how does one calculate that? What's your cost basis for those assets that are just streaming out?

Speaker3: [00:31:02] 100%. Because basically, you turn it into a... It's a variable amount of money going out. So you've sort of struck a price. Because what ultimately what you do is you probably would want to book it. When you move it into the smart contract to pay for that month, that's when you would kind of book a payment going out or sort of thing. But realistically speaking, you actually are picking up a forex delta. Every single day as you relieve it, you're picking up a forex delta off of it.

Mackenzie Patel: [00:31:28] Yeah. It's like how do you track that?

Speaker3: [00:31:30] Yeah, super, super interesting. And this is the fun stuff about crypto accounting. I mean, it really is like-.

Mackenzie Patel: [00:31:37] It's cool. Why people should do it.

Speaker2: [00:31:38] It's constantly changing every hour. I mean, what are resources that you go to to kind of stay up to date on things and keep you up to date?

Mackenzie Patel: [00:31:47] Oh boy. Yeah. I don't do as good of a job as I should. Especially on the crypto news part, I'm definitely still trying to get better at that. So I get like the Bankless newsletter just on the crypto news side. I have crypto Twitter. So that's where I get my actual crypto news. And also just by talking to people in the industry is where I get most of it. But on the crypto accounting side, it's more... I don't know what the FASB really tweets about crypto, so I don't really go to Twitter for my crypto accounting news needs. But a lot of guides are being put out, especially by Big Four. I know like KPMG has some really good guides on NFTs and staking rewards. Like all the Big Four, they just have like here's like a practice aid for this type of crypto activity. My favorite one of all time is the AICPAs accounting for and auditing digital assets. I think it's my favorite thing. I run that so many times at this point. It just got really good use cases and examples.

Speaker3: [00:32:33] Because that's been around for a long time. How has that aged? I haven't looked at it for a while.

Mackenzie Patel: [00:32:38] No, they updated. They released a new appendix I think a couple months ago. And so they are continually updating it. So that's just like... That was my first introduction to crypto accounting. And so just I hold it very near and dear to my heart. So love that one. Yeah, I guess-

Speaker3: [00:32:52] Have they gone. Have they gone? Did their appendix include anything about DeFi or anything like that or it's still kind of like more basic-level stuff?

Mackenzie Patel: [00:32:58] It's more high-level, I guess.

Speaker3: [00:32:59] Staking DeFi.

Mackenzie Patel: [00:33:01] Yeah, I know. Especially it seemed like they had a mining section, just mining, not staking. So I was able to use that. But it is still more fairly high level I think. But yeah. And then also FASB is an exposure draft that came out. The IRS just came out, the new notice about NFTs and collectible rates. So just going into the actual source and seeing those things come up, I just read those.

Speaker3: [00:33:21] I must have missed this. A new item came out on the collectible rates.

Mackenzie Patel: [00:33:27] Yeah. So I forget what... I think they just put out... A request for comment is what they asked for. And so yeah for certain NFTs they will be taxed at the 28%. But they have this thing called the look-through analysis. So basically you have to look through the NFT to what it's actually doing. And is the underlying right or assets? Is that considered a collectible? Is it like a coin? Is it a work of art and what are your rights with regards to that? And if so, then it gets the 28%.

Speaker3: [00:33:51] I think that's the way everyone's been doing it up to this point, is you do a different treatment for a bored ape than you do for a royalty NFT like a token that grants you rights to a house in Atlanta or something. Those are apps. Or you just swap liquidity pool. That's obviously a different kind of like use case than a bored ape or something. That's good that they actually finally codified that.

Mackenzie Patel: [00:34:12] Yeah. So that's why I think NFTs are so fascinating because you really need to understand the exact collection or project and what's the underlying right of this NFT is giving you? Because that can totally change the accounting or at least the tax treatment. So it's like you need to be kind of sharp about what's going on with the collection.

Speaker3: [00:34:27] That's a fun part. I mean, it's a fun part of this is just sort of keeping up on all the things that are happening as the world matures here.

Mackenzie Patel: [00:34:34] Like, oh, this changed. All right.

Speaker3: [00:34:37] Yeah. Like, okay, well, we got to do it. I mean, it is interesting. One of the things that's going to come down the pike here is the FASB guidance has come out. We won't go into too much detail here, but there will be a very different way that we are accounting for all these assets here going forward. There's going to be a couple really interesting parts about that. First of all, so we're moving for a subset of the assets. Well, Mackenzie, I don't know if you saw this part, but it'd be fun to talk about. So for a subset of the assets, you're going be able to move to fair value. There's carve outs on that. So things like governance tokens may or may not be carved out. NFTs are obviously carved out, whereas the NFTs, you still would impair governance tokens, you still impair. The one that was a really nasty carve-out is the wrapped tokens.

Mackenzie Patel: [00:35:21] Yeah, I saw that.

Speaker3: [00:35:21] Yeah. So right now, they're saying that you will be able to fair value treatment for ETH but weith will be impaired. What do you think about that?

Mackenzie Patel: [00:35:35] I mean, based on their definition of expense, when you have rate that gives you an underlying right to then redeem it for E. So it does adhere to their definition. But at the same time, it's like, my gosh, they're like the same thing, So like why do you have this different treatment? But it makes sense. And then there's also like STE. So I think all these derivatives are not going to qualify for the fair value treatment, but it's just going to make the accounting really confusing and kind of hard. If you get a balance sheet and you see ETH, you see WETH underneath it and you're looking at them under two different valuations, that's just kind of confusing for the reader.

Speaker3: [00:36:06] Two different valuations, two different spots, two different parts of the balance sheet, because essentially digital assets are going to move up the balance sheet. ETH and Bitcoin move up the balance sheet, WETH will stay at the bottom of it. I mean, that's really interesting also.

Mackenzie Patel: [00:36:20] Well, I like the disclosure parts of it mentioned, like the disclosures have to get a lot more robust, and then that'll be able to see maybe ETH and WETH next to each other. Here's the cost basis and here's the fair value. So I think that is good. But I mean, it'll keep accountants like me employed, so I guess that's good from that point of view.

Speaker3: [00:36:35] Because we're rolling out... As part of our like inventory views, we're rolling out the ability to have segmented... You can actually select what token is your fair value and what token you're impairing. So that's going to be fun, I guess. I don't know. We'll be announcing that at [ianudible] and showing it off, but.

Mackenzie Patel: [00:36:51] Oh, that's exciting. See, that sounds like fun to me, Pat. I'd be like going through each asset. What is it? I like that.

Speaker3: [00:36:56] The thing that is going to be really tough about all this is that traditionally, most of our clients have treated ETH to WETH as equivalent. What becomes really hard about that is that the important part of that is that when you trade ETH to WETH, you don't pick up a gain or loss. And most people agree with that. It's taking a stock and it's handing it to TD Ameritrade and having them hold on to it in a lot of ways and giving you a promissory note back that you then go and sell. I mean, from a very, very like direct reading of like how this actually works on the blockchain. But suddenly you're actually not going to be able to do that. So suddenly if you do have to impair WETH but not ETH, suddenly that actually has really major ramifications because suddenly that means you cannot treat ETH and WETH as the same item, and that means you do have to do a gain or loss. And potentially for some of our clients, that's millions of dollars of gain or loss on that. Which really sucks.

Mackenzie Patel: [00:37:43] Yeah. I have that is probably more aligning like accounting to the tax treatment because I think the IRS said that wrapping tokens is considered a taxable event. So I guess in that sense, they are more aligned. So we don't have this wide of a gap between what GAAP saying and then like what the IRS is saying. But still, yeah, it's [crosstalk].

Speaker3: [00:37:59] Even that one is super interesting because if the IRS were really to sniff that, does the IRS really think that you can wash trade by going from ETH to WETH and back. Of course they don't. It's one of those really funny things where maybe at first blush, that seems good for them, but when they ultimately get into this and they ultimately look at like the real monetary pieces of this, they don't want you to be able to wash trade that way. They do want you to treat that as the same asset is my prediction on these things. So we'll see.

Mackenzie Patel: [00:38:31] Yeah. I'm still waiting for wash trading to be, I guess, outlawed by the IRS. I think you can still do it with crypto, but I think that's going to go away at some point.

Speaker3: [00:38:38] Well, it depends a lot on how you read. The statute itself is unclear and it does reference security. So it relates back to like if you think crypto is a security or not and all these other things. So we talked to a lot of people who do in fact think that wash trading is illegal today or whatever against guidance today on crypto and do not recommend doing it. But the most recent guidance they gave is that all you have to do is wrap and now it's okay. So you get out of jail free card on wash trading.

Speaker2: [00:39:07] For those listeners out there, can you guys explain what wash trading is just so maybe not familiar with?

Speaker3: [00:39:12] Mackenzie, take it away.

Mackenzie Patel: [00:39:14] Yeah. So you have an asset and then you basically trade it into something else to realize the gain or loss. Well, you want to do it to realize the loss,

Speaker3: [00:39:21] To realize the loss.

Speaker2: [00:39:22] And then you just buy back the original asset. And so you're taking the loss, but you're still ultimately in the same ending position.

Speaker3: [00:39:28] And the government is... I mean, the way that the regulations are written is it's actually incredibly penalized pretty severely when you wash trade, if I remember correctly, because basically, you lose... Mackenzie, you have to remind me of this. I'm sure there's some regulation for it, but basically you have to use the higher cost basis or the lower cost basis on the go-forward period without recognizing the actual loss. So you end up getting penalized when you do wash trade. You don't. And it resets your date. So you take the worst part of trading, which is to change your long-term versus short-term. And then you also get the worst of the cost basis without actually picking up the underlying asset change. I could be remembering that incorrectly.

Mackenzie Patel: [00:40:06] Yeah, I'm not exactly sure about that, but I can see them doing the same thing with crypto because it'd be fairly easy to just, oh, now your cost basis is lower guess and you're now long-term or short-term. So I can see that.

Speaker3: [00:40:17] And so this has been a debate. If you ever have used a tax loss harvesting product, if you do your retail taxes with crypto and you go they all have tax loss harvesting, they tell you to tax loss harvest, generally when they're speaking, the way that... You just have to be very thoughtful about how you're going to do it. So if all you do is sell and then rebuy, there's a very good chance that A, that's not okay today, B, That won't be okay tomorrow, C, even if it is okay today, the IRS tomorrow might decide that it's not okay and that they can do retroactive law like regulation changes around that kind of stuff and something you have to go back and redeclare it. I mean, honestly, if you're very thoughtful about it, there are ways to get exposure to it. Rapping is one potential one, depending on your reading of the rules. Going into liquidity pools is another potential way to tax loss harvest where you maintain exposure to the underlying asset. But you have really dramatically changed the shape of the asset. Yeah, I don't know. It's going to be interesting. It's going to be super, super interesting.

Mackenzie Patel: [00:41:15] We'll see. One thing that's come up recently is I guess on the topic of tax loss harvesting is donor-advised funds because I know Fidelity has their donor-advised charity fund for crypto, which is actually really cool. So you can just donate your assets and then you can realize the loss if you want. But then the charity just has their funds, which is tax-free. So that's also [crosstalk].

Speaker3: [00:41:34] Interesting. Oh, that's great. I didn't hear about that. That's really cool. I assume any sort of funds, once we do get to other ETFs and things like that, that'd be another way that tax loss harvest go out, like sell your bitcoin and buy the fund for it. That'd be similar to traditional tax loss harvesting on the stock exchange. Okay. So Mackenzie, you worked for Figment, did rhetoric there, and now you've stepped out on your own. Tell us a little bit about your new company.

Mackenzie Patel: [00:42:02] Yeah. So we are Hash Basis, your crypto-native accounting firm, which is our tagline. I love it. But we're helping companies with their crypto accounting and bookkeeping and also helping them get set up onto subledgers, like Bitwave, for example. And also we're doing individual crypto tax as well, which does also involve a subledger. So we're kind of doing both of those right now, just kind of seeing what the market is out there, what's the demand for that? But I do eventually see us specializing more in business crypto accounting, like more enterprise level. Because I love US GAAP. I think it's awesome and I really just want to implement subledgers and help clients get their books in order. So that's a little bit about Hash Basis.

Speaker3: [00:42:36] What subledger ae you guys using for the retail side of things?

Mackenzie Patel: [00:42:40] A mix. So we use Koinly quite often, especially if customers have a Cosmos-based activity because Koinly actually has a native integration with both the Osmosis and Cosmos, which is awesome. And then the other ones, I think those are the only two, but they at least pull in the pricing for like Juno or Stargate, so it recognizes it. So we use that, CoinTracker, Taxfit. Those are the main three that we have been using. I saw TokenTax the other day as well, but that hasn't been as popular as the other three.

Speaker3: [00:43:07] Yeah. And you think Koinly is sort of one of the better ones that's out there?

Mackenzie Patel: [00:43:11] I think so. Yeah. I think I just started using it last year because I was doing some personal crypto tax on the side and so I'm just very familiar with that software. But yeah, a lot of the personal ones kind of give you the same results. For me it's more about like how user-friendly is it, how fast is it, does it actually pull an accurate pricing, things like that.

Speaker3: [00:43:26] Yep. Amazing. And how do people find you and get in touch with you and are you guys taking new clients, I assume?

Mackenzie Patel: [00:43:35] Sure, we are. Probably not until after tax season though, because we're already fairly booked. We got our hands full, which is crazy. We just launched like a month and a half ago and I'm like, Courtney, he's my co-founder, I'm like, "I don't know if we can take anybody on until after tax season." So hit me up after April 18th. We can find us at hashbasis.xyz. And then also we're the same thing on Twitter. And yeah, my email is just my name, mackenzie@hashbasis.xyz.

Speaker2: [00:43:58] Awesome. And then you also brought up EDAS, or for those that don't know, Enterprise Digital Assets, some of that's happening end of April, April 25th, right before the conference consensus in Austin, Texas. And you'll actually be speaking there, which we're honored to have you. So I'd love to let the audience know what you're going to be talking about and they could come and meet you.

Speaker3: [00:44:19] Yeah. Give us a sneak preview.

Mackenzie Patel: [00:44:20] Sure. And also, I love EDAS. I was there last year, so I'm so honored to be back. It's really the best conference for crypto accounting tax. Anyone in the financial space for crypto. So yeah, this year I'm going to be talking about... Well, I think the title is going to be like: "It's All About Timing, Accruals and Deferrals in a Cash Basis Blockchain World." And so basically just trying to... Diving more to what we're talking about, Hash Basis versus Accrual Basis, giving some examples of like deferred revenue, accrued revenue, what are the journal entries, how do you even wrap your mind around it and start reconciling these two? So it's going to be all about that. And yeah, I couldn't be more excited.

Speaker3: [00:44:55] Well, I'll give everyone the most popular session... One of the most popular sessions last year was Mackenzie's deep dive into ASC603. Wait, I said it right?

Mackenzie Patel: [00:45:06] 606

Speaker3: [00:45:06] 606, I'm sorry. ASC606. It has been a long day already. All about how to do revenue recognition. So someone who's passionate about doing the actual deep technical accounting like reviews of these kinds of treatments. So should be incredibly fun. If anyone's interested, you can go to edas.live where we are. We have tickets going out there. It's going to be a blast. It's the day before consensus. So if you're already going down to Austin for consensus, which I'm sure a lot of folks listening are, it's come out one day early, learn about it. Come out two days early, and we're doing a full certification course for Bitwave 2, so you can get your Bitwave certified NFT. Learn from 101 onwards on crypto accounting and go from there.

Mackenzie Patel: [00:45:45] I'll be there.

Speaker3: [00:45:45] Mackenzie, you and Courtney are going to be there?

Mackenzie Patel: [00:45:49] Yeah, we'll be there on Monday.

Speaker3: [00:45:50] I assume we have you teaching the class or?

Mackenzie Patel: [00:45:53] No, I'm just a participant. I want to get that NFT. Actually, I think I already have it, but I want to go to learn. So I'll see you.

Speaker3: [00:45:59] Okay. I love it. That's going to be an absolute blast. Well, Mackenzie, thank you just so incredibly, very, very much for coming on today. This was delightful. I think this was the appropriate level of detail. We don't always get into like deep accounting details on a lot of this stuff. This was a great day to actually do that. Really, really fun. Thank you so much for coming on today.

Mackenzie Patel: [00:46:21] Of course. Thanks for having me. As I said, this is great. Thank you.

Speaker3: [00:46:24] We'll have you on again in the not-too-distant future. And to do an update, once FASB comes out and we're all wrapping our heads around that, we'll do a little update on it and go from there.

Mackenzie Patel: [00:46:35] There'll be lots to talk about, that's for sure. We'll also be figuring it out, but we can figure it out together.

Speaker3: [00:46:40] I love it.

Speaker2: [00:46:41] Thanks again, everyone. Thank you for listening and hopefully we have you on soon in the near future and looking forward to seeing you at EDAS. Thanks, everyone. Have a great rest of your week.