BITCOIN

Is Bitcoin Mining Legal?

07 July 2020. Written by Bharath Kanmihalli Bhaskar

With many Institutional Investors and Generation-Z gathering huge interest in Bitcoin Mining and the decentralized cryptocurrency as a whole, it is all the more important to keep oneself informed about the legality of Bitcoin Mining.

In the aftermath of the Financial Crisis, a true form of digital peer-to-peer currency, Bitcoin, made its debut on 31 October 2008. Though to this day most people around the world do not understand the underlying technology and the applications of Bitcoin, we can safely say that in its brief history it has paved the way for a new era of cryptocurrency.

We do not know whether the organization or person behind the mysterious alias Satoshi Nakamoto was affected by the contemporary economic tweaking tools such as interest rates or quantitative easing, but what we do know is that bitcoin is not issued, endorsed or controlled by any single authority. Instead, Bitcoin has a fixed supply of 21 million BTC which are created via a complex cryptographic process known as mining.

While this new paradigm of a decentralized currency is the hot topic of many lunch table debates in enforcement agencies, regulators, central banks and governments, an important question persists: Is Bitcoin Mining Legal?

First of all: what is Bitcoin Mining?

Bitcoin Mining is a process of verifying Bitcoin transactions. The miners get incentives in the form of Block Subsidy and Transaction Fees. These two incentives motivate the miners to legitimize, verify and act as auditors for the bitcoin transactions from far-reaching corners of the world; essentially eliminating any control from a single central authority.

The mining incentives are paid to the miner who solves the cryptographic problem first. The probability of solving the cryptographic problem is hugely dependent on the difficulty and hashrate of the network, and the probability of mining a block increases when a miner teams up with a large and reliable mining pool.

Geographic Distribution of Mining

Electricity prices are one of the most important factors in the bitcoin mining industry, and as a result, these prices dominate the presence of bitcoin mining geographically. Although there are a multitude of factors affecting mining, including “BTC price”, which is highly volatile, the viable electricity prices to reap profits out of this business are ideally 3 to 4 cents per kWh. The lower, the better.

Additional factors are the hashrate, efficiency of the mining equipment and the temperature of the mining location. A sophisticated miner is someone who has machines mining with the lowest possible electricity prices around the world with modern mining equipment in optimal weather conditions.

We try to answer the legality questions which can get lost amid the overwhelming crypto-noise around the world.

North America

Keeping aside the speculations on effects of the US-China Trade war, the United States market has shown some positive signs about Bitcoin mining. A number of publicly traded US mining companies, Canaan and Ebang are some of the leaders pioneering the path to widely legalize mining by filing an IPO on Nasdaq.

Peter Thiel and venture capital-backed, Layer1 Technology, leading chip-maker Bitmain, Crusoe Energy and Immersion Systems have moved to Texas due to abundant natural resources and an excessive wind power pushing down electricity prices. These high-profile mining operations have evoked an institutional interest and investments which point at the exponential growth.

In Canada, Bitcoin Mining is a legal business as long as the revenue generated is transparently reported and audited by the Canada Revenue Agency (CRA). Abundant Oil reserves and energy-rich regions have led Canada to make a significant contribution in securing the Bitcoin blockchain by mining.

Several companies offer contract-based mining equipment to oil and gas companies to let them use extra power to mint Bitcoins. This ensures zero-energy wastage and best value returns to the excessive power, which has zero to very little cash flows.

China

Cheap electricity, abundant hydro power and optimal climate has led China to be a home to many of the top Bitcoin Mining Pools. Though the Bitcoin ecosystem is decentralizing as you read, a major chunk of hashrate (~>=50%) comes from China.

Mining Farms, Pools, crypto exchanges and many colocation facilities pay taxes on the incomes earned. One fact which we can infer is that: The legality lies in the grey area, and given the huge activity spur in China, it is safe to say that the Chinese government is not aiming for a blanket ban o, but more towards the state-regulated operations.

Kazakhstan

In December 2019, a legislative analyst at the National Blockchain Association in Kazakhstan stated that Kazakhstan lawmakers will not tax the income generated from cryptocurrency mining as the tax liabilities were only applicable to the income generated in “real money”. He also added that cryptocurrency mining is not an “entrepreneurial activity” but rather a “purely technological process”.

On June 16, 2020, Askar Zhumagaliyev, Kazakhstan’s Minister of Digital Development, Innovation and Aerospace Industry highlighted the progress and positive investment inflow into Kazakhstan from 14 cryptocurrency mining farms in the country. The government hints at following the footsteps of South Korea and the US in embracing the crypto ecosystem in a regulated manner rather than a complete ban over concerns of illegal activities.

Scandinavia

Norway took a U-turn on a decision taken at the end of 2018, axing tax relief to cryptocurrency miners, in the Government’s revised budget of 2020. Norway had previously suffered from huge criticism towards removal of subsidies for cryptocurrency miners.

Boden, a municipality in Northern Sweden, calls itself “The Node Pole”. Boden hosts around 10 cryptocurrency mining companies, and the Swedish government is one of the most supportive to the cryptocurrency mining. The dirt-cheap electricity cost and suitable climate has staged Sweden as a paradise to the mining community.

Iceland has been in the mining industry since 2013, with the first purpose-built datacenter facilities built in 2014. As a result, mining played a significant role in the buildup of our datacenter industry and has a firm place in our economy. Long term fixed power contracts and the absence of any industry specific taxes has attracted the biggest names in mining to Iceland.

Daniel Jonsson, Large Scale Cryptocurrency Mining Specialist, Eldar Mining

Russia

Latest developments from the draft bill in the parliament relating to cryptocurrencies show that an increasing number of government agencies share the view that cryptocurrencies should be regulated and not banned.

Government’s stance on cryptocurrency mining is even more positive. More and more local governments in the Siberian region embrace mining as a way for utilizing the surplus and renewable energy that the region produces to create economic growth and jobs.

Igor Runets, CEO of BitRiver

Though there are no clear regulations in place for Bitcoin Mining in Russia, the ground reality is more towards a state-regulated operation than a ban on operations.

Bitcoin use around the world

Beyond Bitcoin Mining, there are three other modes of BTC use, which can be segregated into three categories where user adoption of the currency is more prevalent than mining:

  • Normal Daily Transactions
  • Trading on exchanges
  • Initial Coin Offerings (ICO)

Bolivia

Bolivian Financial System Supervision Authority (ASFI) enacted a strict crackdown on cryptocurrency use, recently arresting 60 people at a workshop, and described that use of any sort of virtual currency is “prohibited”.

The Head of ASFI, Lenny Valdivia Bautista, said that virtual currencies (including Bitcoin) were a mere “pyramid scheme”, and that any currency that wasn’t issued or regulated by the government was outright banned by the El Banco Central de Bolivia (the central bank of Bolivia).

Ecuador

In July 2014, the then-President of Ecuador, Rafael Correa introduced a bill that made bitcoin illegal. This law demanded Bitcoin businesses shut their operations immediately.

The aforementioned law also created an Ecuadorian state-issued digital currency “Dinero Electrónico”, pegged one-to-one to the US Dollar (Ecuador’s official currency). However, these measures have not stopped Ecuadorians to buy and sell Bitcoins (at a price premium).

Vietnam

As of 2017, Vietnam’s Central Bank declared digital currencies in the country as illegal and the usage was prohibited. The Law also explicitly states that the currency issued or regulated by the State Bank of Vietnam (Vietnam’s Central Bank) is the only legal tender.

Belgium

Ex-Governor of the Belgium National Bank, Jan Smets said that Bitcoin was not a currency, but highlighted the fact that Bitcoin is not a threat to the country’s financial stability.

As there are no comprehensive policies on cryptocurrencies yet, cryptocurrencies are neither legal nor illegal in Belgium, leaving the air unclear.

Brazil

In November 2017, the Brazilian Federal Reserve Bank issued a public notice that the so-called Virtual Currencies (not to be confused with electronic money) would not be regulated or guaranteed by any regulatory authority as they are not backed by any real assets. It also added that the entire risk is borne by the respective companies, organizations or individuals who deal with these virtual currencies.

Hong Kong

The Financial Services and the Treasury of Hong Kong stated that the existing financial laws were not applicable for Bitcoins and other similar virtual currencies, but the Hong Kong Monetary Authority (HKMA) could impose strict sanctions for illegal activities such as Drug Trade, Money laundering etc.

Australia

Australian citizens/organizations dealing in cryptocurrencies had to deal with a problem of double taxation, both once while buying crypto and selling them.

In a recent ruling by the Australian Taxation Office, this has been repealed. Though Australia has legalized the use of Bitcoin, the Australian Securities and Investment Commission notes that virtual currencies are “high-risk speculative investments”.

Bulgaria

On February 14, 2018, Bulgaria announced that the country joins the position held by the European Supervisory Authorities on the risks involved in virtual currencies. The National Bank of Bulgaria warned that such currencies are highly volatile and the complete risk has to be borne by the respective individuals/organizations dealing in such currencies.

However, Bulgarian tax authorities stated that it is mandatory to pay taxes on gains from selling cryptocurrencies similar to other financial assets.

Written by Bharath Kanmihalli Bhaskar

Bharath Kanmihalli Bhaskar

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