As Crypto Mining becomes increasingly popular, the attention to the tax treatment on CryptoCurrency Mining is essential. Businesses and individuals in UAE involved in the crypto mining activities have concerns regarding the VAT application on such activities. To rectify this concern, the UAE FTA (Federal Tax Authority) has issued Public Clarification VATP039, clarifying the VAT treatment on cryptocurrency mining activities with detailed attention to proof-of-work mechanism.
Key Areas of Focus in The Public Clarification on Cryptocurrency Mining
What is Cryptocurrency Mining?
Cryptocurrency mining is the process of using computational power to validate transactions and adding them to the blockchain by solving complex mathematical problems. The process is also called Proof-of-work. Miners ensure the security and monitor the functionality of blockchain networks, for which they receive rewards as new cryptocurrency tokens or transaction fees.
Implications under UAE VAT for Crypto Mining
An individual can mine cryptocurrency for his/her own or on behalf of others based on a contract. Upon successful attempts to validate blockchain transactions, and being the first to solve cryptographic equations, the person will receive a reward for their contribution. The reward will be generally in the form of proportional share of cryptocurrency that is paid by the network for the person’s propositional share of computational power that is contributed to the network.
Mining Crypto for A Person’s Own Account
In UAE, taxable supplies of goods and services will be subject to 5% VAT rate, unless that is an exemption or zero-rating supplies. A person performing mining activities for his/her own account, where the computation power is contributed to the network and not to any identifiable recipient.
Validating blockchain transactions is considered a contribution but the person should be the first one to solve the cryptographic equation to be rewarded. Hence the reward is not guaranteed as the reward is not solely based on solving the cryptographic equation but also based on the person who solves the equation first. In essence, there is no close nexus between the mining activity and the reward received. Moreover, there is no identifiable recipient for the mining activities performed.
Therefore, mining crypto to personal account will not be regarded as taxable supply and reward earned is not taxable under VAT.
Mining Crypto on Behalf of Another Person (Mining Services Supplied)
The process of mining cryptocurrency on behalf of another person for a fee will be considered as supply of services. Due to the following reasons, the crypto mining activity on behalf of others is considered as taxable supply of services:
- Since there is an identifiable recipient for the crypto mining activity, it is considered as taxable services.
- The VAT rate will be 5% when the service is provided by a taxable person to a customer in the UAE and 0% VAT rate for supplying to a non-resident and all the requirements in Article 31 of Cabinet Decision No. 52 of 2017 on the Executive Regulations under UAE VAT Law for zero-rating is satisfied.
Mining Services by A Non-Resident Person
A resident business in the UAE receives crypto mining services from a non-resident person, then such supply would be taxable under VAT in the following manner:
- If the recipient of the crypto mining services is registered for VAT in the UAE, then the recipient will account for tax on these concerned services, using the reverse charge mechanism.
- If the recipient is not registered for VAT in the UAE, then the non-resident supplier who provides crypto mining services will be required to register for VAT and charge VAT on the services.
Recovery Of Input VAT on Mining Expenses
Input VAT may be incurred for mining activities such as, for example, VAT incurred on mining expenses such as purchase of hardware, utility expenses, rental of commercial real estate space and maintenance services. If the person involved in cryptocurrency mining is registered for VAT should check for eligibility to recover input tax incurred.
Mining Cryptocurrency on Own Account – A person mining for his personal account cannot recover Input VAT as the mining expenses will not be considered as taxable supply.
Mining Cryptocurrency on Behalf of Another Person – The person mining cryptocurrency on behalf of others, acting as a service provider, is eligible to recover Input VAT on mining expenses by providing relevant supporting evidence, such as tax invoices.
Implications For Cryptocurrency Sector in the UAE
Crypto Miners should adapt to the latest regulations, ensuring their crypto mining activities align with the requirements of VAT regulations.
Here’s how KGRN Chartered Accountants help crypto miners to navigate VAT regulations effectively and stay compliant with regulations in UAE:
Understanding VAT Impact: We conduct a thorough analysis on how VAT impacts crypto mining operations to ensure efficient operations
Managing VAT Transactions: We assist with efficient handling of VAT transactions that ensure accuracy and avoid costly mistakes.
Filing VAT Returns: In order to leverage the tax benefits to the maximum, we help crypto miners prepare and submit VAT returns to meet tax obligations.
Meeting Compliance Requirements: We help businesses stay updated with regulations on crypto mining to avoid penalties and complications.
While maintaining compliance with VAT regulations lies with the crypto miners, expert guidance will help streamline the tax obligations and procedures. To effectively navigate VAT regulations, contact our professionals for expert guidance and ensure full-adherence to the VAT regulations.
