With the growing popularity of cryptocurrencies, the UAE's Federal Tax Authority has clarified VAT treatment for cryptocurrency mining activities, particularly those using the proof-of-work mechanism.
Definition of Cryptocurrency Mining
Cryptocurrency mining involves the use of specialized computers (mining rigs) to validate blockchain transactions. Miners receive a reward, typically in cryptocurrency, for contributing computational power to the network.
Mining for Personal Account
When a person mines cryptocurrency for their own account, their contribution of computational power to the network is not directed toward an identifiable recipient. Rewards such as Bitcoin or Ethereum are granted only if the miner is the first to solve a cryptographic equation. Due to the absence of a direct nexus between the activity and the reward and the lack of an identifiable recipient, the FTA states that this activity is not considered a taxable supply under VAT laws. Consequently, expenses incurred for mining on one’s own account, such as purchasing hardware or paying for utilities, are not recoverable as input tax since they do not relate to making taxable supplies.
Mining as a Service
When mining is performed on behalf of another person, for example, by providing computational power or data farm services in exchange for a fee, it constitutes a taxable supply of services. If the service is supplied to a UAE-based customer, it is subject to the standard 5% VAT rate unless zero-rating applies under Article 31 of the Executive Regulation. Services provided to non-residents may qualify for zero-rating if the conditions outlined in the regulation are met.
The FTA's Public Clarification aligns with Federal Decree-Law No. 8 of 2017 on VAT and Cabinet Decision No. 52 of 2017 on the Executive Regulation. It aims to clarify tax treatment for cryptocurrency mining without altering legislative provisions in the UAE.
