The issue of how cryptocurrency mining is treated tax-wise has grown in importance as cryptocurrencies gain popularity.
When it comes to proof of work, anyone can mine cryptocurrency for their own account or for someone else’s account by giving them access to data farms or spare processing power.
In the context of this public explanation, cryptocurrency is a type of virtual asset. Bitcoin, Ethereum (Classic), and other currencies based on proof of work are examples of cryptocurrencies.
The VAT treatment of cryptocurrency mining using the proof-of-work method is made clearer by this public clarification.
Mining cryptocurrency for personal use by an individual
It is not a taxable supply and is not subject to VAT. Cryptocurrency mining on someone else’s behalf, or providing processing power, is regarded as a taxable service. Since a person mining for his own account would not be incurring these costs to generate a taxable supply, input tax on those expenses would not be recoverable.
Input tax paid by a registrant
Mining on someone else’s behalf, however, may be recouped to the degree that the input tax was paid to create a taxable supply.
Cryptocurrency mining is the process by which specialized computers, sometimes referred to as mining rigs, verify blockchain transactions for a particular cryptocurrency in exchange for a potential reward for their computing contribution.
A person has the option of mining bitcoin for himself or hiring someone else to do it for him. The first individual to figure out the cryptographic equation wins a reward for their effort if the attempt to validate the cryptocurrency’s blockchain transaction is successful. This incentive is typically given out by the network in the form of a proportionate share of cryptocurrency in exchange for the user’s proportionate contribution of computational power.
The cryptocurrency’s network distributes the reward for mining efforts rather than receiving it directly from users.
Mining cryptocurrency for personal use
Unless an exception or zero-rating applies, taxable supplies of goods and services made by a taxable person in the UAE are typically liable to 5% VAT.
Only the first individual to solve the cryptographic equation correctly will be rewarded for this contribution, which entails authenticating blockchain transactions.
If someone solves the cryptographic equation, they are not assured of receiving a reward because the award depends on both solving the equation first and solving it successfully.
Provided mining services
A taxable supply of services is created when someone mines cryptocurrency for another person in exchange for a fee. This is because there is a specific recipient for the activity, and the person mining on that person’s behalf gets paid by his client.
Because the activity has a specific receiver and the individual conducting the mining on behalf of another receives payment from his client, the mining operations are considered a taxable supply of services.
The regular rate will apply if a taxable person provides the service to a client in the United Arab Emirates.
Mining services obtained
When a non-resident individual provides mining services to a UAE company, the supply is liable to VAT.
The recipient of these services must use the reverse charge mechanism to account for the tax if they are registered for VAT in the United Arab Emirates. On the other hand, the non-resident supplier must register for VAT in the UAE and charge VAT on the services rendered if the client is a firm that resides in the UAE and is not a taxable person.
Input tax recovery
As part of his mining operations, a person mining cryptocurrency may be subject to input taxes, such as VAT on gear purchases, commercial real estate space rentals, utility costs, and maintenance services.
The individual must consider his eligibility to recoup the input tax paid if he is a registrant. The expenses incurred would not be used to create taxable supplies if someone was mining for their own use. Therefore, the input tax incurred cannot be recovered because the individual mining for his own account is not making a taxable supply; however, if the pertinent supporting documentation, such as tax invoices, is kept, the individual may be eligible to recover the input tax to the extent that it was incurred for the purpose of making taxable supplies.
Lawmaking Citations:
In this clarification, 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 is referred to as “Executive Regulation,” while Federal Decree-Law No. 8 of 2017 on Value Added Tax and its amendments is referred to as “Decree-Law.”
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