What is Double Counting?
Double counting is when a transaction is counted twice, usually in error.
The risk is incorrect profit and loss calculations which could lead to bad decisions (“I thought I owned more.”)
The long definition
In cryptocurrency, double counting refers to counting a transaction twice. It typically occurs due to incorrect tracking of the number of coins exchanged. This may lead to incorrect profit and loss calculations, and in turn, to poor investment decisions.
This is usually due to an error by the investor or the wallet software/accounting and tracking systems they’re using. Overall though, it’s very rare.
Double Counting and the Blockchain
A common scenario involves the investor’s own record of transactions. Some people maintain an independent ledger of sorts to keep track of their assets.
Double counting can occur when the investor records an incorrect number of coins.
For example, if someone transfers 10 coins to another person, but they mistakenly record that they only transferred 8, they have effectively created 2 extra coins out of thin air and added them to the total supply of coins. So, they end up thinking they have more assets than they actually do.
A faulty wallet can also lead to this phenomenon. For example, your wallet may have a bug that causes it to fail to update properly after a transaction, leading to incorrect balances. If you had 20 coins and sent someone 10 coins, but the wallet fails to update properly, your balance will still read 20 coins.
Does double counting lead to extra assets?
Well, no. The surplus coins don’t actually exist and the blockchain can’t be fooled into believing that they do. Designs and underlying technology of blockchain systems are specifically engineered to prevent the creation of additional units of a digital asset.
Therefore, the blockchain always knows each user’s correct balances independent of what the wallet or records may say. This makes it impossible to spend double-counted coins.
Problems Caused by Double Counting
In addition to thinking you have more crypto than you have leading to bad investment decisions, you could also overstate the value of your crypto currency and pay more tax than you should.
How to Avoid Double Counting
You may want to use a software program designed for cryptocurrency accounting such as Ripple. These programs can track and record all relevant transactions and avoid double counting by automatically calculating profit and loss.
Or you can use a spreadsheet to track all your cryptocurrency transactions.