Issue
As cryptocurrencies continue to gain popularity, the question of how they should be taxed, particularly in relation to cryptocurrency mining, has become more significant. In the case of proof of work, individuals can mine cryptocurrency either for their own benefit or on behalf of others by offering access to surplus computing power or data centres. For the purposes of this public clarification, “cryptocurrencies” refer to virtual assets, such as Bitcoin, Ethereum (Classic), and other currencies that use the proof-of-work mechanism. This clarification aims to address the VAT treatment of cryptocurrency mining that employs the proof-of-work method.
Summary
Cryptocurrency mining performed by an individual for their own benefit is not considered a taxable supply and falls outside the scope of VAT. However, when mining is done on behalf of another person, such as providing computational power, it is regarded as a taxable supply of services. Any input tax incurred by an individual mining for their own account cannot be reclaimed, as the expenses are not related to making a taxable supply. In contrast, a registered taxpayer mining on behalf of another person may recover input tax, provided the expenses are incurred while making a taxable supply.
Detailed analysis
Mining of crypto currency
Cryptocurrency mining is the process in which specialized computers, known as mining rigs, validate blockchain transactions for a particular cryptocurrency. In return for providing computational power, miners may receive a reward. An individual can mine cryptocurrency for their own account or enter a contract to mine on behalf of someone else. If the mining attempt to validate a blockchain transaction is successful and the person is the first to solve the cryptographic puzzle, they are rewarded. Typically, this reward comes in the form of a share of the cryptocurrency, paid out by the network in proportion to the amount of computational power the individual contributed. The reward is not directly received from persons on the crypto currency’s network for the mining activities but is allocated from the network.
Mining crypto for a person’s own account
Generally, taxable supplies of goods and services made by a taxable person5 in the UAE are subject to 5% VAT unless an exemption or zero-rating applies. This contribution involves verifying blockchain transactions, with the individual only receiving a reward if they are the first to successfully solve the cryptographic puzzle. A person is not guaranteed a reward if he successfully solves the cryptographic equation, as the reward does not solely depend on the person solving the equation, but also on being the first to solve it. There is no direct link between the mining activity performed by the miner and the reward (such as mined tokens) received. Additionally, there is no specific recipient to whom the mining services are provided. As a result, when an individual mines cryptocurrency for their own benefit, it is not regarded as a taxable supply, and the reward received is not considered payment. Therefore, it falls outside the scope of VAT.
Mining services received
If a UAE business receives mining services from a non-resident, such a supply would be subject to VAT. If the recipient of these services is registered for VAT in the UAE, they must account for the tax using the reverse charge mechanism on these concerned services. Conversely, if the customer is a UAE resident business and not a taxable person, the non-resident supplier is required to register for VAT in the UAE and charge VAT on the services provided.
Recovery Of Input
A person mining cryptocurrency may incur input tax as part of their mining activities, such as VAT on the purchase of hardware, rental of commercial space, utility costs, and maintenance services. If the individual is a VAT registrant, they must assess whether they are eligible to recover the input tax incurred. When mining for their own benefit, the costs are not associated with making taxable supplies. As a result, input tax cannot be recovered in this case. However, if the individual acts as a service provider and mines cryptocurrency on behalf of another person, they may be eligible to recover the input tax, provided the expenses are incurred in making taxable supplies and the relevant supporting documentation, such as tax invoices, is retained.
VAT Public Clarification on Cryptocurrency Mining in Dubai
Cryptocurrency mining, particularly in the context of the proof-of-work mechanism, has gained significant attention in recent years, both globally and within the UAE, as the use of digital currencies like Bitcoin, Ethereum, and others continues to grow. As Dubai has positioned itself as a global hub for blockchain and digital innovations, it’s essential to understand the VAT (Value Added Tax) implications of cryptocurrency mining activities in the emirate, especially as the landscape continues to evolve.
Understanding Cryptocurrency Mining
Generally, taxable supplies of goods and services made by a taxable person5 in the UAE are subject to 5% VAT unless an exemption or zero-rating applies. This contribution involves verifying blockchain transactions, with the individual only receiving a reward if they are the first to successfully solve the cryptographic puzzle. A person is not guaranteed a reward if he successfully solves the cryptographic equation, as the reward does not solely depend on the person solving the equation, but also on being the first to solve it. There is no direct link between the mining activity performed by the miner and the reward (such as mined tokens) received. Additionally, there is no specific recipient to whom the mining services are provided. As a result, when an individual mines cryptocurrency for their own benefit, it is not regarded as a taxable supply, and the reward received is not considered payment. Therefore, it falls outside the scope of VAT.
Mining can be done for personal use, or individuals and businesses can contract with others to mine on their behalf. In Dubai, the regulatory framework surrounding cryptocurrency and blockchain technology has developed steadily, and this includes providing clarification on the VAT treatment of mining activities.
VAT Treatment of Cryptocurrency Mining
The UAE introduced VAT in 2018, and since then, there have been multiple clarifications regarding the tax treatment of various sectors, including cryptocurrencies. The Federal Tax Authority (FTA) has provided guidance that sheds light on how VAT applies to cryptocurrency mining activities.
- Mining for Personal Use
When an individual mines cryptocurrency for their own account, it is generally considered outside the scope of VAT. This means that the mining activity itself does not qualify as a taxable supply. As a result, the reward or mined tokens received by the individual are not subject to VAT. The key point here is that the individual mining for personal purposes is not providing a service to a third party, and therefore, the activity is not considered a taxable supply.
However, if the miner incurs expenses related to the mining process (such as purchasing hardware, paying for utilities, or renting commercial space), these are considered input costs. Since the mining is for personal use and not related to making taxable supplies, the input tax on these expenses cannot be recovered.
- Mining on Behalf of Another Person
The situation changes when cryptocurrency mining is performed on behalf of another person or entity. In such cases, the mining activity is classified as a taxable supply of services. This applies to individuals or businesses that mine cryptocurrency and provide computational power for another party. Since the service is being supplied to another party, VAT would generally apply to the mining activity.
When a person mines cryptocurrency on behalf of another, they may be eligible to recover input tax on associated costs, such as the purchase of mining equipment, rental of commercial space, and other expenses directly related to the mining activity. However, to recover this VAT, the individual must ensure that the expenses are incurred for the purpose of making taxable supplies and that they maintain proper documentation, such as tax invoices.
Key Considerations for VAT Registrants
In Dubai, businesses and individuals engaged in cryptocurrency mining who are VAT-registered must consider their eligibility to recover VAT on input costs. When mining on behalf of another person, input tax can be reclaimed to the extent it is directly linked to taxable supplies. However, if mining is for personal use, no input tax recovery is possible.
It’s also important to note that the FTA’s guidelines emphasize the need for accurate record-keeping. Tax invoices and other relevant documents must be retained to support any claims for VAT recovery. This ensures compliance with the VAT law and avoids potential disputes or issues during tax audits.
The Future of Cryptocurrency Mining and VAT in Dubai
As Dubai continues to innovate in the blockchain and cryptocurrency sectors, the tax treatment of crypto mining is expected to evolve further. The UAE’s commitment to becoming a global leader in the digital economy, alongside the increasing adoption of blockchain technologies, suggests that the regulatory environment may continue to adapt to meet new challenges.
In conclusion, cryptocurrency mining in Dubai presents both opportunities and challenges from a VAT perspective. For those mining for personal purposes, the activity remains outside the scope of VAT, while mining on behalf of others is subject to VAT. It is crucial for businesses and individuals involved in cryptocurrency mining to understand these distinctions and ensure they comply with the FTA’s guidelines to avoid any tax-related issues. As the crypto landscape continues to expand, staying informed about the latest tax regulations will be key to navigating this complex and dynamic sector.
