Accounting for the 'mining' of Bitcoins

In the blockchain technology upon which Bitcoin is based, 'miners' create new blocks that are added to the blockchain by using a 'proof-of-work' approach. Miners use 'brute force' computing power (a huge number of iterative trial-and-error calculations) to find a solution to a designated algorithm in the form of a unique identifier meeting defined parameters specified in the protocol underpinning the cryptocurrency. When a solution is found, this new 'block' is added to the blockchain and can then be used by the miner to record the next set of Bitcoin transactions waiting to be processed. In return, that miner receives:

·???????a reward of a number of newly 'minted' units of Bitcoins for identification of a new block; and

·???????any transaction fees (also in the form of Bitcoins) that the parties to Bitcoin transactions have paid to have their transactions processed and confirmed.

No party is obliged to participate in and/or complete mining activity (a miner can cease their activities at any time) and no specified single party is responsible for providing the new units of Bitcoin to a successful miner. The entitlement to and award is established through a protocol.

The transaction fee is agreed upon by the transacting parties, often by means of a bidding process based on the demand for space in a block.

The following considers how a Bitcoin miner should account for these activities.

Income

Revenue should be recognised at the fair value of Bitcoins received at the time it is earned both for identification of a new block and in respect of transaction fees.

In respect of the 'reward' for identification of a new block, the miner does not have a contract with a specified party in respect of its search for the successful generation of a valid identifier (rather, all parties to the blockchain are subject to the same protocol). As such, the definition of a customer in IFRS 15:Appendix A ("[a] party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration") is not met.

Accordingly, IFRS 15 is not applicable to this aspect of the activities of a Bitcoin miner. Nevertheless, the miner is receiving an asset (in the form of Bitcoins) upon generating a new block.

Hence, income (defined in part under IFRS Standards as an increase in economic benefits in the form of inflow of asset) will be recognised if it can be measured reliably. This should be presented as revenue (albeit not revenue from contracts with customers).

In contrast, the transaction fee is received from the parties to the recorded transaction who have a common and binding understanding that the miner who solves the next block first will be unconditionally entitled to the transaction fee for that transaction. Those parties are the miner’s customers and recognition of revenue with respect to the transaction fee is, therefore, subject to the requirements of IFRS 15.

In both cases, the consideration received is in the form of Bitcoins, not cash, and therefore, as required by IFRS 15:66 (or by analogy to those requirements, in the case of the ‘reward’ for identification), the revenue should be measured at the fair value of the Bitcoins received.

The Bitcoins received should then be classified as an intangible asset in the scope of IAS 38 or, if held for sale in the ordinary course of business, as inventory in the scope of IAS 2.

Costs

The costs the miners incur, which can be substantial, cannot be related to a particular transaction for which the miner will receive consideration (i.e. they do not meet the asset recognition criteria and so will be expensed as incurred).

Property, plant and equipment used in the mining activities would be depreciated over its useful life in accordance with IAS 16.

Source credits: Big Four IFRS Interpretation/publication.