Accounting for Crypto Mining (#317)

This episode described the accounting to be used by a crypto mining operation.

The basic task for a crypto miner is to solve a complex mathematical problem, which gives the miner a financial reward, which is paid in cryptocurrency. The process is more complicated than that, but we’re here to cover the accounting, not the mining process.

Accounting for Crypto Mining Costs

There are two major accounting issues for crypto miners. The first is how to deal with the costs of the operation. If a crypto miner uses cloud mining, this means the miner is renting space on someone else’s computers, which are called rigs. The rental cost of the rig is charged to expense in the period incurred. In this situation, the miner doesn’t have to invest in any computers or software, so there’s really nothing to capitalize.

Or, you might buy the equipment and choose to run your own mining operation in-house. If so, the computers and software are capitalized and depreciated over their useful lives. There’s also going to be a massive monthly charge for electricity, which gets charged to expense in the period incurred. Do not capitalize the cost of the electricity.

Accounting for Crypto Mining Currency

The second major accounting issue is how to deal with the resulting crypto currency. When mining activity results in the creation of currency, you can recognize it at once as revenue – there’s no need to sell it to someone else first. The amount you recognize as revenue is the fair market value of the currency on the date when it’s created.

If you then sell the crypto currency and convert it to cash, then there’s no further accounting to worry about. However, some miners want to hold onto their cryptocurrency for an extended period of time, to see if it appreciates in value. If so, just remember that cryptocurrency is classified as an intangible asset, not currency.

That means you have to reduce the value of the asset if the market value of the currency later declines. And, because generally accepted accounting principles mandate that you can’t write up the value of an intangible asset to a higher amount, you cannot do the reverse. In short, the accounting for cryptocurrency is a one-way street – you can only write its value down, not up.

The only way to record a gain on the value of your crypto currency is to actually sell it for a higher price.

Application of Section 179 to Crypto Mining

Is it possible to use Section 179 of the tax code to take an immediate tax deduction on the fixed assets associated with the operation? Yes, you can, though there’s a cap of just over a million dollars on the deduction for 2021. Another limitation of Section 179 is that the amount deducted can’t exceed the firm’s annual total taxable income. Any excess deduction is carried forward and taken in a later year’s tax return.