Demetrios Zamboglou PhD

Fintech specialist and thought-leader with extensive industry experience and academic background.

Crypto Mining Taxation: The Good and Bad Consequences For the Government

Governments around the world may have turned a blind eye on cryptocurrency taxation some years ago, but the same is not the case today. Countries like the U.S. and Canada, have set laws defining cryptocurrency taxes on the buying, spending, trading, and mining of these
digital assets in a bid to remove ambiguity.
In the aspect of crypto mining taxation, there are laws that clearly define how the creation and sale of these assets are handled. Nonetheless, there are good and bad consequences of cryptocurrency mining taxation to the government. But what are the tax implications for crypto mining? Let's take a look closer look.

Countries with Cryptocurrency Mining Taxes

Some countries that have set up guidelines pertaining to cryptocurrency mining are:
1. The U.S.:
In 2014, the U.S. Internal Revenue Service (IRS) issued guidance governing its crypto tax treatment. According to the IRS, these assets need to be treated as property for U.S. federal tax purposes. As such, they are subjected to the capital gains tax just like stocks and bonds or real estate. In October 2019, the IRS issued an updated version of its guidance.
2. Canada:
In August 2019, The Canada Revenue Agency (CRA) issued an Income Tax Ruling in a bid to clarify its taxation of cryptocurrency miners. According to the CRA, a miner earns cryptocurrency such as bitcoin through their operation. For this reason, miners need to include the coins they mine in their income and as at the time, it was mined.
3. Russia:
There's also Russia looking to introduce crypto mining tax laws. The Association of Banks of Russia had put up a proposal to see how these crypto assets will be taxed. According to the Association, crypto mining is equivalent to finding a treasure and therefore needs to be taxed.

Advantages of Cryptocurrency Mining Taxes to the Government

There are numerous advantages to governments receiving taxes and some of these are:
1. Improving the Economy

Receiving taxes generates more income for the government which can be channelled into the improvement of the economy. It could help in the creation of more hospitals, schools, and advancing technology. On the contrary, unpaid taxes on crypto mining could lead to the government having a more aggressive stance on cryptocurrencies which could have a negative impact on how cryptocurrencies are used in the future.
2. Generation of More Power
A report revealed that bitcoin mining consumes more power than 12 U.S. states. Thus, when consideration is given to the amount of electricity consumed by mining plants, it becomes needful to generate government funds through the operation. The reason is, the consumption of more power makes it necessary for more power to be generated to support the population.
3. Tracking Money Laundering
With laws in place to checkmate those who fail to report their crypto mining taxes, it helps to track sources of income. In return, this can help to curb the use of cryptocurrencies in money laundering and terrorism financing.

The Disadvantage of Cryptocurrency Mining Taxes

There are several disadvantages of cryptocurrency mining taxes to the government and notable among this is:
Tax-reporting Challenges

Despite the guidelines on how cryptocurrency taxes are handled, there is still a level of ambiguity. Moreover, the tax reporting process may be a bit complex especially for those who conduct so many transactions.
Explaining the difficulty in reporting crypto taxes in 2018, Jim Calvin, partner at Deloitte said:
"Properly reporting those taxes right now is certainly more significantly challenging than stocks or securities, because the infrastructure's not there".
That aside, China wanted miners to make an "orderly exit", and cited concerns such as tax issues and environmental pollution. The East Asian country also added cryptocurrency mining to a revised list of industries that needs to be eliminated even though the operation has now been removed from the list.

Germany Passes Law Centered on Cryptocurrencies

On the other hand, Germany has passed a bill that will allow banks to offer direct sales and custody of cryptocurrencies. This was after the Bundestag, Germany's Federal parliament, and the Federal Council passed a law that implements a fourth EU Money Laundering Directive.
With the bill's passing, these financial institutions will be able to offer crypto services to customers. What's even more intriguing, is their ability to handle these assets themselves. Prior to this time, there were expectations that these banks would have to rely on external custodians or dedicated subsidiaries.

Consequences of Germany's Bill

Germany's passing of a bill that will come into effect on January 1, 2020, comes with several benefits. Some of these are:
1. Attract Investors
There can be more investments in Germany since people are encouraged to invest in cryptocurrencies within the country instead of sourcing abroad. In return, this can help to boost the country's economy and foster its growth.
2. Customer Protection
Another huge benefit stems from the very fact that these digital assets will be stored by banks. That being so, it offers customer protection and the confidence that these funds are safe-guarded. Additionally, it creates an avenue for money laundering and terrorism financing through the use of cryptocurrencies to be curbed.
And like these benefits, there are certain consequences that could arise. For instance, these assets will be safekeeping by the bank for a fee, which brings about the potential for them to turn their assets at risk of a total loss to their clients.
Conclusion
Crypto mining taxation has several good and bad sides to the government. However, its benefits greatly outweigh its downsides.
Therefore, crypto miners are encouraged to file their tax returns correctly.

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