Increased crypto adoption has directly resulted in more demand for digital assets. Cryptocurrency mining has, in turn, been on the up over the years. Crypto legislation has been trying to catch up in light of its increased popularity and therein lies the issue. While crypto mining has been associated with tax evasion, is double taxation on crypto mining a possibility? Read on to find out.
Double Taxation and How It Occurs
Double taxation refers to a taxing principle where taxes are paid twice on the same income source. Its occurrence may be legal, and it does occur for some actors. A taxing authority may impose taxes twice during the same taxing period, on the same income source, for the same purpose, and within the same jurisdiction. Such an occurrence raises illegality concerns.
The Susceptibility of Crypto Mining to Double Taxation
Crypto mining may incur several possibilities of double taxation. They include the following.
1. Income Tax on Mining and Capital Tax
Crypto mining activities generate returns to the miner through mining rewards. In most jurisdictions, the rewards represent a taxable income and are subject to an income tax. Tax obligations don’t end there on paying the income tax as per the rates stated by the jurisdiction a miner is based in. The miner is obligated to pay a capital or wealth tax. It is especially applicable in instances where the mining process is done by a registered venture. Such a tax is levied on a venture’s assets, such as the mined coins. Individuals carrying out crypto mining activities would be exempted from paying a wealth tax in many countries. There is, however, a personal wealth tax in practice in some OECD nations.
2. Income Tax from Mining and Sales Tax from Transacting
Income tax from crypto mining is an obligation that every miner must do. The crypto receipts are expected to be spent at some point in time, either directly as payment for goods or when exchanged for fiat money. When such a transaction occurs, the crypto will attract a sales tax. The taxes on the sale of most goods and services come in the form of value-added tax (VAT), where some are exempt by the taxman. While VAT rates on cryptos are yet to be set, they are eligible to attract use tax at the exchange point. It presents another instance of crypto mining attracting double taxation.
3. Taxation at Corporate and Personal Levels
As has been observed in the first point, double taxation increases when a venture rather than a person does activities. When an incorporated crypto mining firm does the mining activities, double taxation in the form of corporate taxes and personal taxes becomes unavoidable. The first incidence is between the firm and its employees. The firm has to pay a corporate income tax on its financial receipts from mining activities. At the same time, its workers are obliged to pay an income tax on the salaries the corporation pays them. The second is income taxes between the firm and its shareholders. One tax is paid on the corporate level as corporate income tax, while the second is by shareholders as income tax in dividends issued. The third is as capital taxes on the firm as well as shareholders. The corporate is obliged to pay the wealth or capital gains taxes on its mining receipts holdings. Similarly, the shareholders are required to pay capital gains taxes on their holdings from the corporation’s mining activities.
4. Taxation by Different Taxing Authorities in Different Jurisdictions
Cryptocurrencies differ from traditional fiat currency in the sense that they’re accepted internationally across many national borders. It is possible for one to have a mining outfit in one nation and transfer their mining receipts to another. Such a situation raises the risk of double taxation. Since crypto legislation is still being drafted, Double Taxation Treaties between nations don’t exist for the asset. Income and wealth taxes will be levied by both the country of residence and the country where it arises.
Crypto mining activities come with risks of double taxation levies, both to individual miners and to mining outfits registered as corporations. However, the occurrence of double taxation is legal rather than illegal form. The nature of taxation is such that income taxes, sales taxes, and capital and wealth taxes will be charged on the same taxable income by the same authority. Instances of taxation at different levels also constitute double taxation. Corporate taxes and individual taxes on both employee incomes as well as shareholders’ holdings within the venture are common. However, the occurrences are not endemic to crypto mining alone and do occur in every other sector.