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Crypto Mining Taxes on the Rise Around the World

Despite the collapse of crypto firms and extreme scrutiny on the digital currency industry notwithstanding, the crypto mining business is humming along

Photo by Shubham Dhage / Unsplash

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Amid the uncertainty in the future for cryptos, the new buzz doing the rounds is the tax on crypto mining.

Virtual currency "mining" means creating cryptocurrency using a "mining machine" to do calculations. For example, at the moment, there are no laws in place in India about cryptocurrencies or non-fungible tokens or NFTs.

The Reserve Bank of India (RBI) attempted to ban cryptocurrencies in 2018. Still, India's Supreme Court threw down the prohibition, putting them in a grey area where they are neither explicitly banned nor legitimately permitted by law.

While NFTs haven't received as much regulatory attention as cryptocurrencies, they face the same legal ambiguity in India.

But cryptocurrencies are considered a virtual digital asset in India and are thus taxable. According to a new law, the tax rate for cryptocurrency trading income is 30% (plus a 4% cess).

Mining Fees & Crypto Taxes

Mining uses high-powered computers or specialised mining devices to validate and record blockchain transactions.

In a blockchain network, nodes or computers, known as miners, verify transactions by competing to solve difficult mathematical riddles. The network determines the amount of bitcoin awarded to the first miner who successfully solves the problem.

For example, in India, the mining industry's earnings will be categorised as follows:

  • This money will be taxed at one's standard income slab rate.
  • Depending on whether it is considered "Income from Business" - if mining is the primary business activity.
  • Or "Income from Other Sources"  - if mining is done on the side or as a hobby.

Windfall for Kazakhstan's Government

According to the reports from the local media, in 2022, tax payments from crypto-mining platforms brought about US$7 million in revenue to the government of Kazakhstan.

This happened when a new regulation was enacted, increasing the tax burden of mining cryptocurrency.

The news comes on the heels of regulatory pressure increases, limiting the industry's ability to get cheap energy and raising the sector's tax burden.

The 2023 new year brought higher costs for companies mining crypto in Kazakhstan. Indeed, Kazakhstan implemented additional levies for the electricity used by Bitcoin miners starting this year.

But that would also depend on the cost of power used by bitcoin farms - with a tax introduced in 2021 may be far higher than the previous levy.

Loss Harvesting vs. Biden's Heavy Tax on Miners

According to research released by the National Bureau of Economic Research (NBER), crypto traders are "harvesting" losses during periods of extreme market volatility to use them as tax deductions against future gains.

The investigation, which used data from 34 cryptocurrency exchanges and involved 500 major retail dealers, showed that the highly unregulated asset class rapidly became a go-to for tax evasion.

In 2018, when the price of Bitcoin dropped by 30%, the researchers predicted that traders using the magnitude of "tax-loss harvesting" they uncovered would have cost the US Treasury as much as $16 billion.

Since its inception in 2009, crypto trading has seen phenomenal growth. Nearly a third of Americans aged 18–29 say they have invested, traded, or utilised a cryptocurrency, and the market was valued at more than US$1 trillion in the first half of 2022.

The regulatory apparatus needs to be more robust.

The NBER paper said, "The need for oversight and policy clarity on crypto taxation is among the most pressing because existing tax laws and regulations were not designed to deal with the rise of crypto-assets."

DAME Tax on US Crypto Miners

President Joe Biden has proposed a budget for fiscal year 2024 that would tax cryptocurrency miners in the United States 30% of the cost of the electricity they use.

This proposal has sparked debate about whether or not it would reduce global emissions and energy prices.

Cryptocurrency mining is a resource-intensive process that involves attempting to solve increasingly difficult equations to add new blocks to the blockchain and validate them.

The White House puts it this way: the so-called DAME tax is meant to spur discussions about "the harms" that crypto firms pose to the public.

The Digital Asset Mining Energy (DAME) tax proposes that "firms" pay a tax equivalent to 30% of the cost of the power used in cryptocurrency mining.

This would cut revenues substantially, if not completely, and render the enterprise useless.

All in all, the general view is that across the globe, the tax on crypto mining is rising.

So, a green way to mine may be the way forward for energy conscious world.

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