Simple Case Study on Bitcoin Mining

Blockchain Technology & Cryptocurrency Accounting/Tax:

Simple Case Study on Bitcoin Mining

(1) Background:  Company A is incorporated in Singapore.  The business activity is in Bitcoin Mining.  The company deploy software and hardware to “mine BTC” in the blockchain.  They also purchase and sell BTC-mining computer hardware.  A Company can also be engaged to mine BTC for customers.

(2) Fundamental Questions:

(a) What is Bitcoin Mining in the Accounting and Tax context?

(b) What are the Revenue, Expenses, Assets and Liabilities of BTC Mining Companies ?

(3)  What is Bitcoin Mining: 

Bitcoin mining is NOT a process like a Miner going into the “Computer-Mine” with a mining equipment and machinery to try an extract “virtual coins” from the mine.

Bitcoin mining is the process by which transactions are officially entered on the blockchain and new bitcoins are launched into circulation. Miners use hardware and software to generate a cryptographic number that is equal to or less than a number set by the Bitcoin network's difficulty algorithm.

Mining is the process that Bitcoin and several other cryptocurrencies use to generate new coins and verify new transactions. It involves vast, decentralized networks of computers around the world that verify and secure blockchains – the virtual ledgers that document cryptocurrency transactions.

(4) ACRA Business Activity Description

The Business Activity of Mining (within a Blockchain) is the activity of data processing, hosting and related services.  There can be also general information technology or consultancy activities. There is no specific dedicated SSIC code just for cryptocurrency mining. It is important to choose the correct SSIC code as it impacts licensing requirements, regulatory compliance, and tax benefits. 

(5) Broad Accounting Concepts and Treatments

So, following from the above, a Mining Company in the Blockchain world would:

• Generally have revenue of providing data hosting services
• Information and data processing services revenue
• Other mining-related IT consulting services
• If mining hardware is involved eg. purchase of hardware (for sales as machines to customers); then this would be inventory and hardware sales.
• If mining hardware is purchased to be used as fixed assets to be office equipment, then they would be accounted for as office assets

A mining company may perform a host of varied activities as per described above. Therefore the accounting of the separate streams of revenue must be accurately identified and classified.

The Services Revenues should also be identified and classified correctly.  For example,

• Some derive a fixed fee for amount of BTC mined
• Some derive a varied percentage of the amount of the BTC mined as the “mining-fee” and this is paid in BTC (which would involve the exchange conversion to book-currency).
• Some could also keep the revenue earned as BTC and long-term invest in BTC; OR actively trade in BTC
• Between investment holding BTC and trading BTC actively, there are differences in tax treatment.

Cost and Expenses

• The largest costs is usually the Electricity Costs (for the mining activity). It relies on the hardware and software constantly running to do the verification work.
• Direct Costs and Expenses that are identifiable to revenue streams are relatively easier to match.
• Common costs/expenses may require certain bases to allocate so that profit margins of different products and services can then be accurately accounted for.
• This would also have different implications for Tax treatment.