Crypto taxes are bad policy

When the Council of Economic Advisers initially proposed a 30% excise tax on bitcoin mining organizations in March 2023, the price reaction to bitcoin was swift as the crypto asset fell below $20,000. After this initial shock, and with other geopolitical and economic issues at the center – especially as the As the US banking sector continues to struggle with instability and bank failures, this idea fell out of focus. In what some considered a surprising move, the CEA revived the debate and controversy surrounding this proposed excise duty via a Twitter thread seeks to explain and justify this proposal.

Reasonably enough, this proposed tax drew criticism from the crypto sector, both when it was first discussed and when it was revived in the public debate. Arguments against this excise tax include that bitcoin mining actually uses a significant percentage of renewable energy to mine, and that cracking down on the US crypto mining industry would simply cause it to move overseas. The CEA proposal argues that crypto miners do not pay the “true” cost of the electricity consumed in their operations, and that using renewable energy sources only denies these renewable sources to other electricity users.

Such arguments have been presented before, but they miss the most important points. The crypto sector has evolved dramatically even just in the last 18-24 months, but the political conversations surrounding mining and crypto in general have not – the stance of the Securities and Exchange Commission is clear evidence of this.

Let’s take a look at why a crypto mining fee rate misses the mark from an economic and crypto perspective.

Bitcoin specificity. In most political conversations, the reference to crypto mining is a thinly veiled reference to bitcoin mining, and this reflects the fact that policy debates have not kept pace with market innovation. Although bitcoin continues to dominate the financial market coverage of cryptoassets, and tends to be the crypto of choice for institutions looking to diversify into crypto, the fact is that bitcoin is just one cryptoasset. In addition to representing only one aspect of the crypto space, this policy apparently ignores the facts created by the progress of the EthereumETH 2.0 upgrade.

Following the completion of the Merge and Shapella upgrades, the Ethereum blockchain and ETH have transitioned from a proof of work consensus model to proof of stake. In addition to the technical changes regarding validators and staked ETH, this will also cause the energy consumed by the Ethereum blockchain to drop by 99%, according to most estimates. With many of the new blockchain use cases running on Ethereum, this dramatically lower power requirement should be part of the conversation, but that doesn’t seem to be the case when it comes to this fee plan.

Energy mix updates. A common refrain among policymakers advocating punitive taxes and other disincentives against cryptomining is that these firms consume (and waste) large amounts of electricity. Trying to determine whether any business is worth consuming electricity, in any quantity, is a slippery slope that should be avoided at all costs. Governments don’t have a stellar track record for allocating scarce resources, and electricity is no exception.

In addition to this market reality, there is also the fact that the crypto mining world has increasingly moved towards sustainable investment options. According to a 2022 report issued by the Bitcoin Mining Council, the share of energy consumed by the bitcoin mining community from sustainable sources increased to 64.8%. For some context, according to the US Department of Energy, approximately 20% of all US energy comes from sustainable sources.

Instead of blaming crypto, and by extension blockchain, for yet another problem, politicians would do well to look objectively at the energy landscape.

Global significance. With the wide variety of headlines and market movements, it’s easy to lose track of a simple but powerful fact. While the future of transactions remains uncertain, the fact is that blockchain-based transactions and tokenization of assets of all kinds have quickly moved from a forecast to a market reality. If institutions as large and systemically important as JP Morgan and Blackrock embrace these trends, it takes very little imagination to see how these trends will dominate the financial markets.

To innovate and think about these new forms of payment, and how to better store and share information more widely, investors and entrepreneurs require an environment that is at least neutral. Payments and the efficient transfer of digital information are, and will continue to be, the driving factors that determine which companies, trading blocs and nation states take leadership positions going forward. Enacting short-term and/or punitive taxes on an entire industry, which many believe is the future of transactions, payments and data transmission, is bad political policy and poor economic decision-making.

The crypto industry is not perfect, but passing a tax on crypto mining ignores the changing nature of crypto, taxes firms that have adopted renewable energy, and hinders future investment and development.

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