What do new crypto mining taxes mean for Bitcoin?
In early March, the US Treasury Department announced plans to impose a 30% tax on US-based crypto mining operations. Also, the US Treasury Department signaled that going forward, all crypto mining companies will have to provide a detailed report on their power consumption, with the goal of making these crypto miners as energy efficient as possible. As might be expected, this has been universally recognized as bad news for Bitcoin (BTC 10.44%) miners everywhere.
But what impact will the new crypto mining taxes have on the future value of Bitcoin? After all, the US is now the top country in the world for Bitcoin mining, so any negative impact on US-based miners is going to affect the overall Bitcoin ecosystem in a big way. Here’s a closer look at three different scenarios and how they might play out.
Scenario 1: The good
The good news, if you want to call it that, is that the tax on Bitcoin mining won’t go into effect immediately. It will be phased in over a period of three years, at a rate of a further 10% each year. This will theoretically give crypto miners the chance to adapt to the new reality. They would have two basic choices: move to a new crypto-friendly jurisdiction abroad or go all-in on clean energy sources that consume a minimum level of electricity.
Image source: Getty Images.
This scenario has happened before and it has not had a lasting effect on the value of Bitcoin. For example, China’s ban on crypto mining, which only began to take effect in 2019, was supposed to raise the value of Bitcoin, but it never happened. At the time, China accounted for more than half of the world’s crypto mining activity. Bitcoin miners simply picked up the business and moved to other countries with abundant energy resources, including Canada, Kazakhstan and the United States. Also, a number of the largest Bitcoin mining operations now claim to be relatively green in terms of energy consumption. Instead of relying on fossil fuels, they already use solar, wind and geothermal power.
So, in this scenario, there would not be a big hit to the value of Bitcoin. The long-term growth story of Bitcoin remains in place, and the world’s most popular crypto will be relatively unfettered on its long march back to previous all-time highs.
Scenario 2: The bad ones
The bad news is that the new crypto tax is an “excise tax” — the kind of tax that’s usually levied on a product like alcohol or cigarettes that a government doesn’t want you to consume. As the US government indicated back in September 2022, it fears the perceived negative environmental impacts of crypto mining.
As a result, miners will not be taxed based on profitability, but rather on how much energy they use. There is no way around this treasure, and the inevitable outcome could be a disturbing pattern of high-profile Bitcoin miners. Bitcoin miners already have it tough, and this new 30% tax could spell death for all but the biggest and most profitable mining operations.
If the Bitcoin mining industry becomes too centralized, with only a handful of major players left, it could start to have a real impact on how Bitcoin is used on a global basis. After all, Bitcoin miners are used to validate new transactions and add new blocks to the Bitcoin blockchain. With a lack of real competition, this process can take longer or become prohibitively expensive for many transactions.
In this scenario, the price of Bitcoin may face quite a lot of resistance. Most likely, investors will start to completely turn away from cryptos like Bitcoin that require mining. Instead, they would fully embrace proof-of-stake cryptos such as Ethereum which does not require mining. In fact, this could be the catalyst for the mythical “Flippening” – the moment when the market capitalization of Ethereum surpasses the market capitalization of Bitcoin.
Scenario 3: The Ugly
This last scenario is one that is just too painful to acknowledge for many Bitcoin bulls. Suppose the centralization of Bitcoin mining becomes too high and one Bitcoin miner eventually finds a way to control more than 51% of the total Bitcoin mining activity. If so, Bitcoin may face an existential crisis. As described by the crypto textbooks, this can lead to the dreaded “51% attack”, which is one of the worst things that can ever happen to a blockchain. In this scenario, the Bitcoin blockchain could stop working, which would have disastrous consequences for the price of Bitcoin.
Investment of takeaways
Right now, it seems that the only crypto mining stocks worth buying are the greenest, cleanest, and most eco-friendly. Suppose you are thinking of buying a crypto mining stock. If so, it’s time to stop focusing solely on profitability and revenue and to consider energy consumption as well because only the greenest Bitcoin miners are going to make it. The story for Bitcoin miners is then pretty cut and dried.
The outlook is more complex for Bitcoin, which has come a long way in its 14-year history. At each new turning point, it has found a way to innovate, thanks to its incredibly decentralized network and passionate community of users. While there is no doubt that the Bitcoin mining industry is becoming more and more consolidated, the “bad” and the “ugly” scenarios described above will likely take years, if not decades, to play out.
So I remain bullish on the long-term future of Bitcoin. But I’m also hedging my bets by looking into clean, energy efficient, proof-of-stake cryptos that could eventually replace Bitcoin as the preferred crypto payment option globally.
