Crypto currency mining - VATP039
VATP039
VAT Public Clarification
Crypto currency mining
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.[1] 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[2] for his own account is not a taxable supply[3] 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[4] 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[5] in the UAE are subject to 5% VAT unless an exemption or zero-rating applies.
A person undertaking mining activities for his own account, contributes his computational power to the network and does not contribute such computational power to any identifiable recipient.
This contribution involves validating blockchain transactions, and the person may only be rewarded if he is the first to successfully solve the cryptographic equation.
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.
As such, there is no close nexus between the mining activity conducted by the miner and the reward (e.g. mined tokens) received. Further, there is no identifiable recipient to whom the mining activities are provided.
Consequently, a person mining crypto currency for his own account is not considered to be making a taxable supply and the reward received is not considered as consideration[6], and would fall outside the scope of VAT.
Mining services supplied
A person mining cryptocurrency on behalf of another person for a fee is considered to make a supply of services.[7]
As there is an identifiable recipient for the activity, and the person performing the mining on another person’s behalf receives a consideration from his customer, the mining activities performed constitute a taxable supply of services.[8]
If the service is supplied by a taxable person to a customer in the UAE, the supply of services will be subject to the standard rate.
However, the supply may be zero-rated if it is made to a non-resident and all the requirements for zero rating under Article 31 of Cabinet Decision No. 52 of 2017 on the Executive Regulation of Federal Decree-Law No. 8 of 2017 on Value Added Tax, and its amendments, ("Executive Regulation") are met.[9]
Mining services received
Where a UAE business receives mining services from a non-resident person such 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.[10]
Conversely, if the customer is a UAE resident business and not a taxable person[11], the non-resident supplier is required to register for VAT in the UAE[12] and charge VAT on the services provided.
Recovery of input tax
A person mining crypto currency may incur input tax as part of his mining activities, including, for example, VAT incurred on purchases of hardware, rental of commercial real estate space, utility expenses and maintenance services.
Where the person is a registrant[4], the person must consider his eligibility to recover the input tax incurred.
If a person is mining for his own account, the costs incurred would not be for the purpose of making taxable supplies.
Consequently, as the person mining for his own account is not making a taxable supply, the input tax incurred cannot be recovered.[13]
However, if the person acts as a service provider, and mines crypto currency on behalf of another person, the person may be eligible to recover the input tax to the extent the input tax is incurred for the purpose of making taxable supplies, provided that the relevant supporting evidence, e.g. tax invoices, are retained.[13]
This Public Clarification issued by the FTA is meant to clarify certain aspects related to the implementation of the Federal Decree-Law. No. 8 of 2017 on Value Added Tax and its amendments, and Cabinet Decision No. 52 of 2017 on the Executive Regulation of the Federal Decree-Law No. 8 of 2017 on Value Added Tax, and its amendments.
This Public Clarification states the position of the FTA and neither amends nor seeks to amend any provision of the aforementioned legislation. Therefore, it is effective as of the date of implementation of the relevant legislation, unless stated otherwise.
Legislative References:
In this clarification, Federal Decree-Law No. 8 of 2017 on Value Added Tax and its amendments is referred to as "Decree-Law", Cabinet Decision No. 52 of 2017 on the Executive Regulation of the Federal Decree-Law No. 8 of 2017 on Value Added Tax, and its amendments, is referred to as "Executive Regulation".
[1] Article 1 of the Executive Regulation defines the term 'virtual assets' as digital representation of value that can be digitally traded or converted and can be used for investment purposes, and does not include digital representations of fiat currencies or financial securities.
[3] Article 1 of the Decree-Law defines the term 'taxable supply' as a supply of goods or services for consideration during the course of business by any person in the UAE, and does not include exempt supply.
[4] Article 1 of the Decree-Law defines the term 'registrant' as the taxable person issued with a TRN.
[5] Article 1 of the Decree-Law defines the term 'taxable person' as any person registered or obligated to register for VAT purposes under the Decree-Law.
[6] Article 1 of the Decree-Law defines the term 'consideration' as all that is received or expected to be received for the supply of goods or services, whether in money or other acceptable forms of payment.
[7] Article 3(1) of the Executive Regulation states that a supply of services shall be every supply that is not considered a supply of goods, including any of the following:
The granting, assignment, cessation, or surrender of a right.
The making available of a facility or advantage.
Not to participate in any activity, or not to allow its occurrence, or agree to perform any activity.
The transfer of an indivisible share in a good.
The transfer or licensing of intangible rights, for example rights of authors, inventors, artists, rights in trademarks, and rights which the legislation of the UAE deems to be within such category.
[8] Article 2(1) of the Decree-Law states that tax shall be imposed on every taxable supply and deemed supply made by the taxable person.
[9] Article 31 of the Executive Regulation states:
The export of services shall be zero-rated in the following cases:
If the following conditions are met:
The services are supplied to a recipient of services who does not have a place of residence in an Implementing State and who is outside the UAE at the time the services are performed;
The services are not supplied directly in connection with real estate situated in the UAE or any improvement to the real estate or directly in connection with moveable assets situated in the UAE at the time the services are performed.
The services are not treated as being performed in the UAE or in a Designated Zone under Clauses 3 to 8 of Article 30 and Article 31 of the Decree-Law.
If the services are actually performed outside the Implementing States or are the arranging of services that are actually performed outside the Implementing States.
If the supply consists of the facilitation of outbound tour packages, for that part of the service.
For the purpose of paragraph (a) of Clause 1 of this Article, a person shall be considered as being 'outside the State' if they only have a short-term presence in the UAE of less than 30 days and the presence is not effectively connected with the supply.
As an exception to paragraph (a) of Clause 1 of this Article, a supply of services shall not be zero-rated, if the supply is made under an agreement that is entered into, whether directly or indirectly, with a recipient of services who is a non-resident, if the following conditions are met:
The performance of the services is, or it is reasonably foreseeable that the performance of the services will be, received in the UAE by another person, including but not limited to, an employee or a director of the non-resident recipient of services.
It is reasonably foreseeable, at the time the agreement is entered into, that the other person in the UAE will receive services for which input tax is not recoverable in full under Article 54 or Article 57 of the Decree-Law.
[10] Article 48(1) of the Decree-Law states if the taxable person imports concerned goods or concerned services for the purposes of his business, then he shall be treated as making a taxable supply to himself, and shall be responsible for all applicable tax obligations and accounting for due tax in respect of these supplies.
[11] Article 30 of the Decree-Law states that where the recipient of services is in business and has a place of residence in the state, and the supplier does not have a place of residence in the state, the place of supply shall be in the UAE.
[12] Article 13(2) of the Decree-Law states that every person, who does not have a place of residence in the UAE or an implementing state, shall register for tax if he makes supplies of goods or services, and where no other person is obligated to pay the due tax on these supplies in the UAE.
[13] Article 54(1) of the Decree-Law states that the input tax that is recoverable by a taxable person for any tax period is the total of input tax paid for goods and services which are used or intended to be used for making any of the following:
Taxable supplies.
Supplies that are made outside the UAE which would have been taxable supplies had they been made in the UAE.
Supplies specified in the Executive Regulation of the Decree-Law that are made outside the UAE, which would have been treated as exempt had they been made inside the UAE.