What are the best wallet hygiene practices for digital assets?

As digital assets become a permanent part of the investment portfolios of many investors, how you manage your wallet matters just as much as the tokens and assets you hold. Maintaining effective wallet hygiene is a must for accurate record-keeping, tax reporting, and long-term crypto management, helping prevent costly mistakes that can turn tax season into a stressful and costly exercise. 

At Onchain Accounting, we work closely with crypto investors and businesses to bring order to the chaos, and in this post, we’ll let you know what we as a crypto tax professional consider to be the best wallet hygiene practices for digital assets.

Why is digital wallet hygiene important? 

When you take everything together, digital wallet hygiene is all about keeping your crypto transactions and wallets organized to avoid unnecessary accounting and tax inaccuracies, and by extension, reducing the risk of non-compliance, audit failures, and the wasting of time and money. Here’s why good digital wallet practices truly matter: 

• Protects assets from loss and fraud—A well-maintained digital wallet is less likely to encounter hacks, phishing attacks, and accidental losses. Keeping separate wallets and using private keys helps avoid risky interactions and keeps assets under your control. 
• Simplifies record-keeping and reporting—While every crypto transaction is recorded on the blockchain, it can be like trying to find a needle in a haystack when good wallet hygiene is not maintained. When good wallet hygiene is maintained, it makes it a lot easier.
• Reduce compliance and audit risks—Incomplete and inconsistent transactions and record-keeping can raise red flags with the authorities and cause quite a headache for you during tax season.
• Saves time and professional fees—Reconstructing transaction histories in a disorganized wallet is a herculean task, even for the most skilled and experienced cryptocurrency tax accountant. By having detailed records from the beginning, you can expect faster turnaround times, fewer corrections, and lower cleanup costs. 
• Influences financial decision-making – With a disorganized wallet, you are unlikely to understand the ramifications of your financial decisions. However, when you know where your assets are, how well they are doing, and how they are being used, you can make informed decisions that can help further your financial goals.

What are signs of bad digital wallet hygiene? 

Bad wallet hygiene is something that often goes unnoticed and will manifest itself in full force when tax season, audits, and security issues come about. As crypto tax accountants, here are some of the most common signs we see in badly maintained digital wallets:

• Inability to identify which wallet was used for what purpose or transaction
• Frequent transfers between your wallets without proper records 
• Missing or incomplete transaction histories
• The use of one wallet to handle multiple holdings
• Reliance on memory to recall transactions instead of documentation
• Mixing business and personal crypto activities
• No clear record of cost basis 
• Inconsistent gains, losses, and tax reports.

What are the best digital wallet hygiene practices?

When it comes to maintaining and improving your digital wallet hygiene, following what crypto tax professionals consider the best practices can help protect your assets, keep records clean, and make crypto investing a more worthwhile pursuit. Here’s a list of some of the best digital wallet hygiene practices every digital asset holder must follow: 

• Assigning consistent labels for wallets and transactions—When you assign each wallet and transaction a specific purpose, thereby creating a ‘wallet legend,’ you will be able to effectively track each transaction and understand its purpose, allowing you to more easily spot irregular or unauthorized transactions. 
• Adopting crypto accounting software—With the help of a crypto CPA, you can integrate crypto accounting software with features such as real-time monitoring and automated tracking, among others, to cut down on errors and simplify the whole accounting process. 
• Performing regular audits and checks—Schedule regular audits and checks to detect anomalies, identify errors, and correct them, as well as maintain up-to-date records. 
• Separating personal and business records—Mixing personal and business accounts is a recipe for disaster, as it complicates compliance and reporting. Keep your personal and business accounts separate to easily manage both. 
• Keep offline backups—As a security precaution, it’s always wise to keep some backups of your wallets to reduce the damage you suffer should your wallet be hacked or lost. 
• Working with professionals or outsourcing if needed—As crypto transactions become increasingly more complex, handling everything by yourself can be difficult, which is why it is sometimes necessary to work with a crypto tax professional to help keep clean records, ensure compliance, and reduce stress.

Conclusion 

Maintaining good digital wallet hygiene is a foundational step in the management of your digital assets. As crypto activity becomes more complex, investors who do not maintain clean digital wallets often find themselves facing challenges and complications that can result in costly mistakes and unnecessary cleanup and rebuilding work. 

If you’re looking for help keeping your digital wallets and assets organized, Onchain Accounting is here to help. At Onchain, our crypto professionals provide a wide range of crypto services that help investors and businesses maintain clean, audit-friendly records that are fully compliant with regulations. Take control of your digital wallets with confidence—contact Onchain Accounting to streamline your crypto accounting and move forward with peace of mind.