Monday, 13 July 2020

Yes, bitcoin mining will be taxed too (and mining rigs treated as capital assets)

The taxation of what is called "mining" of crypto-currencies, such as bitcoin, begs a number of novel questions.
Bitcoin and other crypto-currencies operate using the blockchain, which is essentially a heavily encrypted public ledger. Where bitcoin is transferred from one person to another, a transaction will be recorded on the blockchain. To make this change to the blockchain, complex algorithms must be solved, which require substantial computing power.

In practice, specialised computers referred to as "mining rigs" are used by miners in an effort to increase the speed at which these transfers can be effected. These mining rigs provide most of the processing power utilised by the blockchain and are responsible for the verification of transactions, and the addition of new blocks.

There are two incentives to become miners. First, any bitcoin user who uses bitcoin in a transaction will pay a small transaction fee that will be received by the miner processing that transaction. Second, and most importantly, the miner can be issued with "fresh" bitcoin by the network itself as consideration for the mining services. These bitcoins are referred to as fresh because they are new and have not yet been in circulation. As certain algorithms are solved correctly, fresh bitcoin is unlocked from the system and issued to the miner.

The South African Revenue Service (SARS) is likely to treat bitcoin and all crypto-currencies as assets and not legal tender or currency, and general tax principles would apply.

In the context of mining bitcoin, both the transaction fees and the fresh bitcoin mined are likely to be income in nature. The full value of the fee or the fresh bitcoin received in consideration for the mining services will form part of the miner’s taxable income. The specialised computers forming the mining rigs are likely to be treated as capital assets.

The miner will be entitled to claim certain deductions, such as the cost of electricity, internet connection, and any capital allowances in respect of the hardware (if applicable). Further deductions may be claimable, though this is largely dependent on the facts of each miner’s particular circumstances.

As the popularity of bitcoin and other crypto-currencies increases, it is only a matter of time until regulators promulgate specific rules applying to this new class of asset. Until then, it is strongly recommended that anyone dabbling in the world of crypto-currencies seeks advice from those with the knowledge and expertise necessary in this mercurial new field.


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