Accounting for Cryptocurrency Mining
Your Cryptocurrency Accounting Questions Answered
Day after day, cryptocurrency trading and investing continues to grow. Currently, there isn’t a regulatory body that oversees cryptocurrency transactions. However, there could be regulations coming soon. Read on to understand the requirements for cryptocurrency mining and what you need to be aware of if you aim to start mining yourself.
What is cryptocurrency mining?
Unlike Fiat currencies such as the USD, EUR, or GBP which can be printed by governments, cryptocurrencies need to be mined. Cryptocurrencies can be mined by anyone, and this process “prints” new digital money from a finite preset supply in the currency’s code.
To “unlock” these new blocks of Bitcoin, miners use powerful computers which can decipher heavily encrypted code. This process is called “Proof of Work”. As the miners process cryptocurrency, the computer network allows the everyday person to send or receive cryptocurrency. In our current financial system, Visa, Mastercard, Chase, or Bank of America would facilitate the sending or receiving of money. For cryptocurrency, miners use their computing power to allow these transactions to occur decentralized from any one party. Their reward for giving up their computing power is this newly mined cryptocurrency.
So why do you need to account for cryptocurrency mining? Consider it a business. Just as you receive revenue from mining (such as Bitcoin rewards) and operational expenses (such as computing power and utilities), this means there are now tax implications, future cash flow projections, accounting treatment of revenues, proper journal entries, and any other accounting necessary for any business.
What are the potential accounting impacts of mining?
There currently are mixed views on how to account for received cryptocurrency. Some parties see this an exchange transaction, which creates income, whereas other parties argue for internally generated intangible assets. In the second scenario, there would be capitalized assets.
If the cryptocurrency received is treated as income, then it may be treated as revenue only if there is an enforceable contract with a customer. However, in the process of mining it is not always clear who the customer is. If the miner treats the received currency as income, it will measure the income at the fair value of the cryptocurrency received.
One final possible treatment for cryptocurrency rewards because of mining is treating the blocks as inventory items. This is a good option if the business plans on selling the earned Bitcoin in the future in the ordinary course of business. Think of this option as treating your business like a coal mine.
How to proceed going forward?
Currently, there is no official guidance on accounting for cryptocurrency mining provided by GAAP, IFRS, or any other governing body. This does not mean that there is not a set of rules to be established, followed, and continued for the foreseeable future. Plenty of businesses are meeting with CPA firms to discuss which accounting method makes the most sense for their business and which is the easiest to defend as more official standards are adopted.
Regulations, technology, and processes will continue to adapt and change, so if you have questions regarding mining cryptocurrency, contact your Adams Brown advisor today.