The 13 ways a business’s crypto balance can go up
Not all additions to a wallet are revenue. But they are additions.
Hi Professionally Curious One!,
I’m currently focused on growing my own income driving endeavors including more contracting work. As I go figure out what type of work I can do, and get, I validated that I have a professional domain expertise across:
Financial Thinking
Crypto Thinking
Product Thinking
Technology Thinking
Process Thinking
Compliance Thinking
This is giving me this 100% geeky and nerdy professional confidence, and I recognize that there aren’t that many people figuring this crypto thing out as I am.
So while I did say I was going to look at other stories to write about beyond Crypto, I wanted to spend some time with this prompt:
So You Want To Audit Crypto?
Which led me to:
“What would a bootcamp that helps Traditional Big 4 Professionals with Crypto look like?”
Well that’s a pretty big topic.
So I narrowed this one down to:
“What are the revenue drivers that every Big 4 Professional needs to know when approaching Crypto”?
And thus, this piece was born.
Also I am 100% using this for any future work. Thanks past me!
Obligato!
In Case You Missed It
Sections You Can Skim To:
Crypto Business Revenue 101: Not all additions to a wallet are considered revenue.
Crypto Wallet Additions: The 13 ways a business’s crypto balances can go up
An overview of each transaction type
Crypto Business Revenue 101
TL;DR: Not all additions to a wallet are considered revenue.
Crypto Token Additions
When it comes to Crypto Revenue Recognition, one must understand the mechanics of how a crypto account - a “Crypto Wallet Address” - can increase. Before considering anything about the fiat, or USD, value of any transactions, let’s focus our time on simply understanding sheer crypto addition mechanics.
An addition is anything that increases the carried value in a wallet, or account, certain additions are not considered revenue, but they are additions to the wallet.
Now a crypto wallet can be at the center of several thousand transactions per year, even per month.
The challenge as a public accountant that’s never seen crypto is a classification and attribution issue:
How do we as a business identify what’s revenue, and thus would have a tax implication, and what isn’t revenue, and thus shouldn’t be taxed on?
Depending on how a transaction is classified will determine the financial risks and your approach to audit and validate the business purpose of said transaction, and whether it’s income or not.
Crypto Wallet Additions
TL;DR: There are 13 ways for a business’s crypto balance to go up.
The 13 ways a business’s crypto balance can go up
Product Sales
Service Contracts
Transaction Fees
Mining
Staking
Secondary Sales
Transaction Trading Fees
DeFi Incentives
Airdrops & Gifts
Creation
Loans
Return of Capital
Token Purchase Agreements
An Overview of Each Crypto Transaction Type
TL;DR: Each transaction has a flavor.
Note: Everything here relates to transactions carried out in someway, whether partially or holistically, on the blockchain. However, all blockchain companies are startups, and startups will come up with traditional fiat based deals to get them by. The fun ones are the traditional deals converted into crypto-based deals.
Product Sales
My business sells software license keys directly for 1 ETH, as per my online ecommerce store-like setup.
This is exactly what you think it is.
Service Contracts
My business renders services, such as projects, agency, or consulting, in exchange for a stated crypto value based on my negotiated contract.
My business can do fixed contracts - 10 ETH per Month, for 3 months
My business can also charge it like labor 1 ETH per 4 hours.
This could also be from partnerships contracts
Transaction Fees
My business offers a middleman service, similar to Stripe, where in my business charges a nominal fee, or %, on every transaction facilitated.
It’s like paying the gas, and the convenience fee!
Mining
My business uses computer hardware and/or software to “mine” Crypto. Basically my business is solving complex mathematical problems, and in return for solving said problems and helping the broad blockchain ecosystem record transactions across the blockchain, it rewards me with a variable amount of crypto.
I could hit jackpot, or I could get a share of rewards with other crypto miners.
Staking
My business supports the ecosystem by depositing crypto with a validator, in return for staking rewards, which can be thought of as interest.
My business will receive crypto earnings on a set frequency, or when I withdraw my staked principal balance.
Staking Validators also follow the same logic.
Secondary Sales
My business authored NFTs with a 20% ownership percentage. Every time the NFT sells between various buyers and sellers in the market, my business automatically gets 20% of the sales price.
This is perpetual, and indefinite.
Trading Fees
My business is supporting market making activity (liquidity to facilitate currency exchanges) as a Liquidity Pool Partner. I deposit qualifying assets, and in return, I am entitled to a % of all trading fees incurred on all transactions facilitated by the pool.
It’s like a partnership, except this is also perpetual and indefinite, until I cash out.
Defi Incentives
My business is capitalizing on an incentive from a blockchain protocol in a similar fashion of Credit Cards offering Reward Points. I stake 100 ETH with a protocol, and in addition to my staking rewards, the protocol is offering me additional rewards in the form of another token. That last part is called a form of Defi reward.
Is that new token worthwhile, or worthless? IDK it’s a sweetner.
Airdrops & Gifts
My business is the holder of several NFTs from a particular artist / company. These NFTs have membership-reward value as stated by the company, but not recorded on the chain. From time to time, my business, as exclusive holders of these NFTs, will receive additional rewards - and it can literally be anything - from the company.
This can be referred to as phantom income
These are usually gifts given their unexpected and/or legally unobligated nature
Creation
My business, for brevity’s sake, creates tokens. These net new tokens are not from an existing blockchain, but instead, are from a brand new blockchain. They are set to release on a schedule cadence.
My business is “manufacturing” and adding to its own inventory, tokens that have not yet been sold. There could be a perceived market value on them already, but the tokens that are in my businesses wallet are fresh and never been sold or traded.
Loans
My business deposited stablecoins, and in return, I received an agreed upon Ethereum that is around 60% to 99% of the deposited value.
This is associated with CDPs, or Collateralized Debt Positions.
Return of Capital
My business entered into an agreement with another business the required a security deposit. At the end of an agreement, the security deposit is returned. Alternatively, my business deposited crypto into a staking/defi contract. When I withdrew my crypto, my initially deposited amounts were returned to me in addition to any earnings I received based on my duration and amount staked.
Token Purchase Agreements
My business entered into a Token Purchase Agreement to purchase tokens of another business or blockchain at a very cheap par value. Like, 0.00015 cents per token cheap, and my business bought $100 worth at time, 3 years ago.
Per the Token Purchase Agreement (TPA), after the period of vesting, distributions from the entity will occur per the contractual rate, and will continue to distribute until the amounts are fully vested and realized, or an agreed-upon contract termination happens.
Thanks for reading this, and stay tuned for the next piece that either goes in-depth around the processing and reporting of each transaction type, or the fiat consideration. Haven’t decided yet…
Want to stress- just because my crypto wallet balance goes up, it doesn't mean every single transaction that moved it up qualifies as revenue. In many cases, they aren't!