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Cryptocurrency Mining Regulations

There’s mounting international attention on cryptocurrency. After a decade of talk, more voices now call for regulations around it.
Some regulations will protect consumers, and others will protect government interests. Still, others will protect the environment.

In the United States, cryptocurrency has become a focus of the SEC, the CFTC, the FTC, the IRS, the OCC, and the FinCEN. No end of the debate is in sight. The conversation, however, has been focused almost entirely on buying and using cryptocurrency.

The regulations few are talking about are those around mining cryptocurrency. 

Is cryptocurrency mining currently regulated? What do miners need to know?

The Chinese government recently cracked down on Bitcoin mining within their borders. Miners were effectively sent abroad (most to Kazakhstan, Russia, and the U.S.) with their equipment and investments in tow.

What was China’s rationale for cracking down, though? What regulations are in place elsewhere? And what does the future of Bitcoin and other cryptocurrency mining regulations look like?

What Is Bitcoin Mining?

“Mining” of cryptocurrency is how new coins enter circulation. The mining process is a complex sequence of equations solved by a decentralized computer network. Decentralized computers around the world maintain the blockchain ledger. New coins “mined” are the reward for their work solving the complex transaction equations.

Cryptocurrency mining is demanding because the encrypted transaction equations are so complex. High-performance computers use the latest processor technology and run 24/7 because the miner who solves each equation is the one who earns the new coin.

That race to the finish line of each transaction has created a digital “gold rush” of crypto mining, particularly of Bitcoin.

The original Bitcoin Protocol by the founder Satoshi Nakamoto caps the total number of Bitcoin at 21 million. Bitcoin was easier to mine in the beginning so that more coins would enter circulation.

Today, however, solving one Bitcoin equation takes hundreds of times the energy and computational power that the original equations required. 

Cryptocurrency mining has nonetheless attracted more miners and investments. Many miners fail because the process is costly and only sporadically rewarding.

The changing regulatory landscape could impact mining for better or worse.

How to Regulate a Gold Rush

The biggest draw to crypto mining is the prospect of gaining newly minted crypto coins. With Bitcoin valued at almost $60,000 per coin in April 2021, Bitcoin mining has garnered special attention.

Source: Blockchain.com

The governments of each country where mining takes place see the booming industry as an opportunity to tax gains, of course. New tax laws are also being used to support or pressure the crypto mining industry (for better or worse). 

In countries like El Salvador and even states like Montana and Wyoming, new tax laws incentivize more mining. This differs from China’s own tax decisions that pushed mining operations out of the country.

China also used another regulatory trope to discourage Bitcoin mining: new laws around energy consumption. Because of the sophisticated computers needed to mine cryptocurrency, miners have become an unprecedented energy consumer.

Governments that oppose crypto mining cite the energy-hungry operations as a principal reason for rigidly regulating the industry.

Source: https://www.reuters.com

As in El Salvador, another approach to regulating mining comes in the form of recognizing Bitcoin as legal currency—or forbidding it. The progressive Salvadoran president just lobbied successfully to recognize Bitcoin and the decision will have a huge impact on the Salvadoran economy. More foreign miners will come in droves.

Foreign miners will also bring tremendous amounts of money into alternative energy development in El Salvador, bringing us right back to the issue of energy. The regulatory questions around crypto mining and energy consumption are clearly interrelated. 

Here, we’ll take a closer look at each.

Taxes and Cryptocurrency Mining

Tax law is the easiest way for governments to wield their interests over Bitcoin mining.

In cases like the Bitcoin Law in El Salvador, tax laws come in the form of exemptions that favor Bitcoin adoption and mining. The Bitcoin Law acts as a magnet to more industry investments on a local level, too.

Bitcoin tax laws in other countries with more conservative outlooks have come in the form of taxing capital gains and reporting trading losses. Those laws, however, still haven’t addressed Bitcoin mining, specifically.

Even in China where the recent crackdown on Bitcoin took place, the new restrictions didn’t touch the current tax structure around Bitcoin mining. Instead, the Chinese government actively shut several Bitcoin exchanges down, forcing many miners to transfer operations across borders.

As new tax laws unfold, the legislation will affect how appealing (or not) the current digital gold rush will be country to country.

In the United States, reporting capital gains and losses from trading or investing in cryptocurrency has been relatively straightforward. In the early 2010s, the SEC came out with their first assessment of crypto that required declaring gains and losses.

Bitcoin mining, however, has still-undefined tax implications. For now, Bitcoin mining is considered a sticky business that requires multiple tax forms to report the same information. Evolving state regulations add to the dubiety.

The following outlines the current process for taxing and reporting Bitcoin mining in the United States.

Bitcoin Earned Through Mining

Bitcoin earned through mining is reported as gains, which are taxed at regular income tax rates. The value of each Bitcoin is determined by the day it was received (mined). 

Bitcoin mining operations have their Bitcoin taxed at different rates if their business is classified as a commercial operation versus a hobby.

If Bitcoin is mined by a business entity, there are standard tax deductions that can lower the company’s tax liability. The costly nature of mining can be deducted as “ordinary and necessary expenses paid or incurred…in carrying on any trade or business.” That’s good for miners with the huge investments they make in energy and equipment.

Taxes on The Sale of Mined Bitcoin

When Bitcoin is mined, that creates a taxable event. Then, if those Bitcoin are sold, that creates a second taxable event. The “gain” of Bitcoin is taxed by its value at the time it was mined, then the sale is taxed at the value it’s sold for.

The value received for Bitcoin is reported as a profit or loss against the original cost basis (the value of the Bitcoin when it was mined minus the cost of mining).

Current U.S. Bitcoin Mining Regulations by State

State tax law lends another view of how Bitcoin mining is taxed. Some states encourage mining operations within their borders. Others are driving them out.

At the time of this article, no federal law in the U.S. explicitly prohibits Bitcoin mining. No laws confirm its legality, either. Instead, the federal government has left these decisions to the states.

Several states have passed legislation to encourage Bitcoin mining through tax breaks and regulatory “sandboxes,” namely:

  1. Rhode Island
  2. Kentucky
  3. Iowa 
  4. Montana
  5. Wyoming

USA Territories

The motivations these states have to encourage mining is no secret, either. Mining operations gain states more tax revenue, boost employment, and creates more public utility revenue, especially in energy consumption.

Montana is leading the development of Bitcoin legislation related to mining and transactions. In 2017, governor Bullock used grant money to fund a large Bitcoin mining project. In 2019 the legislature passed a bill exempting cryptocurrencies from security laws.

In a similar move, legislators in Wyoming passed a law the same year providing cryptocurrency developers, sellers, and exchanges certain exemptions from securities and money transmission laws.

Other states like Pennsylvania have passed laws that encourage Bitcoin mining through another route: energy consumption.

It’s About Energy

Cryptocurrency mining requires a great deal of energy. The sophisticated computers running the distributed ledger include hundreds of thousands of mining operations around the world. 

In the Xinjiang region of China where a recent power outage was sourced to the Bitcoin mining operations there, energy consumption concerns manifested in an increased pressure on miners to spread out. This helps avoid similar infrastructural crashes in the future.

No matter the geographical spread, however, miners have other pressures to become energy-conscious. And with the development of better hardware and new energy solutions, they’re doing exactly that.

In the 10 years since the crypto mining industry boomed, the computer processors used to mine coins have become thousands of times more efficient. This hyper-capable equipment became the new status quo because anyone mining with older equipment will have unsustainably high energy costs. The competition drives energy consciousness.

Cryptocurrency miners are a unique energy consumer and their place in the market has inspired regulatory responses around energy, too.

Bitcoin mining is illegal, for instance, in nations like Bolivia, Ecuador, Egypt, and Algeria.

Countries like El Salvador, on the other hand, are encouraging Bitcoin mining and adoption. The invitation includes the proviso that investors come prepared to develop the country’s untapped renewable energy sources. It’s a win-win for miners and for the host country.

Renewable and cleaner energy is a “must” for cryptocurrency miners today for several reasons: 

  1. Energy on the grid is now too expensive to make mining profitable
  2. Energy on the grid results in too many carbon emissions, and Bitcoin’s footprint is unsustainable
  3. Energy on the grid does not have the infrastructure to support the energy demands of cryptocurrency mining
  4. The energy requirements of the blockchain will only grow, and renewable energy sources are the only long-term solution

Hydroelectricity, coal, and natural gas are the most reported power sources
Source: Cambridge, https://www.jbs.cam.ac.uk

Self-sustaining energy initiatives have pushed some cryptocurrency miners to the front of the pack. For example, the EZ Blockchain initiative using natural gas cryptocurrency mining has been revolutionary for two industries: crypto mining and the oil and gas industry.

The oil and gas industry has recently been up against its own regulatory challenges: 

  • Consumption of fuels was down in 2020 during rolling lockdowns where the world pressed a hard “pause” on travel;
  • And practices like fracking and natural gas flaring have come under fire. 

New regulations require oil and gas producers to meet new standards or eliminate practices like flaring altogether.

By 2020, these requirements made oil and gas producers more receptive to the idea that EZ Blockchain’s own Sergii Gerasymovych had been pitching for more than a year. The industry lacked the infrastructure for oil and gas producers to sell natural gas to market. Instead of forcing that investment with anti-flaring laws, EZ Blockchain wanted to use that natural gas on-site.

Flaring could be eliminated by turning natural gas into productive energy right on the oil pad.

With the power-hungry Bitcoin mining industry looking for smarter energy sources, taking stranded and flared natural gas off producers’ hands to use it for crypto mining posed a win-win for both industries.

EZ Blockchain has installed “Smartgrid” systems across North America. These systems include specially-engineered mobile crypto mining centers powered by natural gas generators. Those generators take in all the natural gas that the oil and gas producers would have otherwise wasted.

EZ Smartgrid

New Needs, New Regulations

The symbiosis of cryptocurrency and oil and gas is one of many examples of crypto miners moving toward a sustainable future. Thought leaders in the crypto industry have also created new international agreements to promote conscientious standards in mining energy consumption.

With this development, the decentralized nature of crypto has proven to flourish with self-regulation.

In 2021 there was nonetheless a hearing before the U.S. Senate Committee on Banking, Housing, and Urban Affairs that zeroed in on cryptocurrency miners. The loudest voices called for tighter regulation.

Opponents of the decentralized network referred to transaction ordering and incentives that miners earn as “bribes.” They also called for “greater scrutiny” on miners’ activities.

These perspectives, however, hinged on the view of cryptocurrency miners as intermediaries, like gatekeepers to consumer buyers and their cash. This perspective is erroneous.

Given the investment that miners make as businesses, others at the hearing corrected this characterization to explain that miners’ role is actually one of a service provider.

Several states like New York have already set precedents that miners are not considered “financial intermediaries.” This standard remains in place for now.

 

With more miners moving to the U.S. after the crackdown in China, there will be more scrutiny on the crypto mining industry coming soon. The only way to keep the Bitcoin network working as it was designed to be to keep educating thought leaders and consumers.

Stay ahead of cryptocurrency mining regulations by following EZ Blockchain articles. Look for news on sustainable energy and its role in the crypto mining of the future, too.

Contact us to learn more.

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