Technology

In the beginning there were two companies, Senex Solutions and XonaSoftware.

Senex provides accounting services for traditional funds, CTAs, proprietary trading firms and even some individual traders. Senex developed its own double entry, multi-currency, general ledger-based accounting system. Senex's expertise lies in accounting for options and futures on equities and commodities as well as Forex, cash bonds and other instruments.

XonaSoftware is workload automation software that is used by many financial and other institutions to automate mid and back office processing. Xona brings a dozen years of experience in automating critical business processes, including collecting data from various sources and crunching data.

Clarity Analytics started as a joint venture between these two firms. The goal is to merge the power of a fully automated platform with a talented, crypto-focused team, who know each client to make sure they get the best tax treatment and service.

Data

It all starts with the data. For a traditional prop shop or fund, most accounting data come from a clearing firm like Wedbush, Marex, etc. With digital assets, that information comes from the blockchains or from APIs provided by centralized exchanges. There is no standard for these APIs so there is considerable integration required for each exchange we support.

Clarity uses read-only API keys provided by our clients to connect to centralized exchanges and gather data using those exchange's proprietary APIs. Our clients also provide DeFi wallet addresses that we use when scanning the blockchains for their transactions and balances.

Making Sense of It All

The blockchain is a public ledger, and all the details are available. The challenge is deriving the intent of the client from the transaction details. For this we use a lot of computer science like graph theory and AI.

For example, ETH is exchanged for APE. With a complex transaction like 1INCH or Curve.fi, there can be two dozen steps. The system needs to properly understand how many lots of APE were received from ETH and discover all the fees along the way for a proper accounting. Some APE or ETH might have been paid in fees and it's important to capture that because those fees are deductible.

Classification is also important. It's important to determine if it's staking, pledging, adding to a liquidity pool, borrowing or repaying, and so much more.

SPAM, Phishing and other nonsense is all over the blockchain. Part of the classification process is filtering these transactions.

Pricing

Pricing is more important than most think. In traditional accounting, pricing is not an issue because transactions are denominated in an established currency that does not require contemporaneous valuation. But, if you trade in crypto, your transactions are often denominated in ETH, BTC or other native coin or token that does require immediate pricing and conversion into base currency such as USD, EUR, etc.

We collect volumes of pricing data from numerous exchanges and other data sources like pyth (https://pyth.network/) each day. Our pricing database delivers accurate market prices at the time of each transaction. For example, if you trade ETH for DOGE, you sell ETH and buy DOGE. Accurate market prices at the time of the trade are needed for both legs of the trade. Also, fees in ETH or DOGE may be paid and those are effectively a sale that may also have a gain or loss associated with it.

At the end of each day, we mark each customers' positions to the fair market value, which will be reflected in the reports.

A lot of software uses closing prices for everything traded on the day. With the volatility in the crypto market, closing prices alone are not accurate enough to satisfy an IRS auditor.

Managing Cost Basis and Holding Period

Managing cost basis and holding period is very important. One of the challenges of crypto is that funds may move between wallets quite often, and when this happens the cost basis and holding period must be tracked. Otherwise, the IRS may consider the transfer a sale at market value followed by a purchase.

Staking, borrowing and repayment create challenges to tracking cost basis. With some forms of staking, ETH (for example) is loaned and the trader gets stETH in return. In this case, stETH is like a coat check token. In some instances, depending on the protocol, when you liquidate the transaction by returning the stETH, you get ETH back with interest. Since you are receiving property, the ETH, that is materially the same, the initiation of the transaction is not a realized taxable event. You are, however, taxed on the interest income.

Processing the Data

Once all the data is collected, our staff gets involved. We may need to reach out to get some clarification on an activity. For example, something was purchased or an NFT was traded with a counterparty without going through an exchange. These data are captured by our expert staff.

It's important to capture these data correctly. New regulations require 1099-CRYPTO forms to be filed. Our people will do that on behalf of our customers.

Reporting

Reports are generated each night and are available on our client portal.