How accountants can help crypto-mining clients

July 17, 2019 11:33 AM

Imagine walking into a CPA’s office ten years ago to ask for tax advice on this new digital currency called Bitcoin.

You tell the bewildered accountant that you use computers to “mine” this currency on the internet, but you’d like to know how to stay on the IRS’s good side while doing so. After turning you away, the people in the office will probably question your sanity for investing in meaningless internet money that will never be worth anything.

Today, you are the CPA, but you don’t turn away crypto mining clients — you want to help them manage their real business expenses and tax liabilities. But without much information, you must improvise most of your advice based on context clues.

That system has been good enough until now, but the days of crypto mining ignorance won’t last much longer. As mining continues to grow in popularity, accountants must learn better strategies to serve this growing niche.

What is crypto mining?

Every cryptocurrency works a little differently, but most share similar characteristics. Bitcoin’s mining process provides enough context for CPAs to understand the basics.

It is important to note that all cryptocurrencies are digital assets that are labeled in an encrypted and anonymous fashion. To unlock new blocks of Bitcoin (that is mining, to print new digital money), crypto miners use powerful computing devices that are capable of deciphering heavily-encrypted information — this is called "Proof of Work." This ongoing, alpha-numeric crypto-puzzle allows Bitcoin miners to self-verify transactions and prevents users from malicious tampering on the blockchain. Miners who successfully solve the crypto-puzzle before other miners receive a certain quantity of Bitcoin for their efforts.

If that makes your head spin, think of crypto mining in simpler terms. If you are a natural gas mining company, you must spend time researching and discovering where to mine to get to the gas. But you don't know exactly where the gas is; you have many competitors and all of you must work hard to tap into the underground gas. The first mining company to successfully reach the gas is financially rewarded for completing their hard work.

For non-technical people, crypto mining may forever remain a bit of a mystery. But for accountants, one truth matters above all — cryptocurrency miners are running businesses. Those businesses make money and incur expenses just like any other. Mining operations deal with the usual headaches of crypto on a much bigger scale, so CPAs must be prepared before trying to help clients account for mining income.

Accounting for mining revenue

Accountants for crypto miners must track and manage an incredible number of variables. Mining operations need to know how much crypto they generate, how many payouts they receive, the cost basis of each payout and the ever-changing balances of their accounts.

With so much uncertainty, old-school solutions like spreadsheets lack the essential power that CPAs need. To serve crypto mining clients, accountants should seek smarter tools that can handle diverse functions, such as:

1. Audit trails

Businesses love blockchain technologies because they offer immutable audit trails. To serve high-volume crypto clients, CPAs must offer audit trails that can handle pages of transactions and provide smart insights to prevent errors and fraud. The more accurately CPAs can track crypto transactions, the more valuable their insights are.

2. Constant syncing

Crypto miners tend to operate on multiple crypto exchanges and hold multiple wallets. People this deep into the crypto scene want to earn as much digital currency as they can. Help crypto miners keep their records up-to-date by using technology that can sync automatically with all the wallets and exchanges miners use.

4. Multilevel security

Not everyone needs to know everything. Some miners want to share read-only files with investors and partners, while others need distributed administration privileges to streamline operations. Pick a solution with robust privacy and security features that prevents unwanted access while limiting opportunities for human error.

Understanding a complicated path to wealth

Cryptocurrency mining offers a complicated path to wealth, but that won’t stop thousands of miners from taking up digital pickaxes to look for crypto gold. Your mining clients need you to understand the volatility and potential of their businesses. Find the right tools and keep tabs on the latest updates in the crypto world to become the crypto-savvy CPA your clients deserve.