VATP039

Issue

With the rising popularity of cryptocurrencies, the question of tax treatment of crypto currency mining has become increasingly relevant.

In a case of proof of work, a person can mine crypto currency for his own account, or for someone’s account by providing access to excess computational power or data farms.

For purposes of this public clarification, “crypto currencies” are a form of virtual assets. Examples of crypto currencies include Bitcoin, Ethereum (Classic), and other currencies that are based on proof of work.

This Public Clarification clarifies the VAT treatment of crypto currency mining using the proof-of-work mechanism.

Summary

Crypto currency mining by a person for his own account is not a taxable supply and falls outside the scope of VAT.

Mining crypto currency on behalf of another person, i.e. supplying computational power, is considered to be a taxable supply of services.

Input tax incurred on expenses by a person mining for his own account would not be recoverable as the person would not be incurring these expenses to make a taxable supply.

However, input tax incurred by a registrant mining on behalf of another person may be recovered to the extent that the input tax is incurred to make a taxable supply.

Detailed analysis

Mining of crypto currency

Mining of crypto currency is the process where specialised computers, also known as mining rigs, validate blockchain transactions for a specific crypto currency, for which a reward may be received for the contribution of computational power.

A person can mine crypto currency for himself or contract with another person to mine on their behalf.

If the attempt to validate the crypto currency’s blockchain transaction is successful, and the person is the first to solve the cryptographic equation, the person receives a reward for their contribution.

This reward is, generally, provided in the form of a proportional share of crypto currency that is paid out by the network for the person’s proportional share of computational power that has been contributed to the network.

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 person in the UAE are subject to 5% VAT unless an exemption or zero-rating applies.