What Kazakhstan’s new tax regime means for the crypto mining industry

On July 11, Kazakhstan’s president, Kassym-Jomart Tokayev, signed new tax rates for crypto mining operators into law. Although these changes reflect the country’s growing frustration with the undertaxed and non-transparent use of the national power grid by both foreign investors and domestic perpetrators, the new taxes can hardly be called exclusionary.

Moreover, they could signal further adoption and legalization of mining in energy-rich Kazakhstan, making the country and region an even more attractive destination for miners, while intensifying pressure in more established jurisdictions.

Reality check

The two changes will come into force on 1 January 2023, and will link the tax rates to the price mining operators pay for the electricity. Following a progressive scale, an operator would have to pay $0.024, or 10 tenge, in tax for a kilowatt-hour (kWh) of energy at the lowest price of $0.012–0.024, and $0.0072, or 3 tenge, at the highest of $0.048 – 0.060 per Kwh. Those who use renewable energy that they produce will meet the most favorable conditions at just one tenge per kWh.

These recent changes are not the Kazakh government’s first attempt to tax the industry. An earlier bill was signed by Tokaev on June 29, 2021, introducing an additional payment of $0.0023, or 1 tenge, at the time for 1 kWh of electricity consumed for mining.

The tax changes became a landmark in the long and difficult history of Kazakhstan’s relationship with cryptomining, which drew a wave of foreign mining operators to the country. According to some estimates, more than 87,849 mining machines have been brought to the republic by November 2021. Kazakhstan’s star on the global mining map sparked quickly after the nationwide crackdown on crypto mining in China. In 2021, the country ranked second in global Bitcoin (BTC) mining – only behind the US – and accounted for 18.1% of the global Bitcoin mining hash rate.

Chinese miners have moved their operations to Kazakhstan, believing it to be “a paradise for the mining industry” because of its stable political environment and cheap electricity. The Kazakh government, for its part, has welcomed the wave of new investors by supporting cryptomining to the point of direct subsidies — experts have expected more than $1.5 billion in tax revenue from mining over the next five years.

Digital mining was recognized as a legitimate business activity earlier in 2020 when the Law “On Amendments and Additions to Some Legislation of the Republic of Kazakhstan on Regulation of Digital Technologies” laid the foundation for crypto regulation.

However, the fairy tale met reality in early 2022 when it became clear that both x-factors for mining – political stability and energy abundance – were far from guaranteed. By the end of 2021, it became clear that the country’s energy system did not have the capacity to accommodate all the miners, and in January 2022, nationwide protests over fuel prices led to a brief political collapse, with Russian troops stepping in to defend the status quo.

Coincidentally, after the political tumult of the winter, Kazakh authorities reassessed their stance on cryptomining and began efforts to bring the sprawling industry under control. On February 8, Tokayev ordered a cabinet-level investigation into cryptocurrency mining, with Kazakhstan’s First Deputy Minister of Finance Marat Sultangaziyev proposing power price increases for crypto miners. Since then, the government began periodically reporting shutdowns of illegal miners, with the largest case occurring in March when 55 illegal mining farms “voluntarily ceased operations” due to an enforcement campaign by regulators, with another 51 units’ operations “terminated”. “

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In May, the country’s digital development minister added new reporting requirements for miners and passed the now-signed tax guidelines in first reading to domesticate the industry and avoid further problems with power shortages. The authorities even publicly acknowledged the impact of the winter raids on revenue, which amounted to a modest $1.5 million in Q1 2022 – a figure that barely matches the ambitious forecasts mentioned above.

Reservations and benefits

Speaking to Cointelegraph, founder and CEO of cryptomining firm Sazmining William Szamosszegi took an unapologetically oppositional stance towards Kazakh authorities’ attempts to regulate the mining industry. While environmental problems caused by energy consumption are certainly a concern, he believes that regulations may not be the most effective solution because they do not increase innovation and instead increase the cost of living for ordinary people. Translated into higher food and energy prices for the population “on the ground”, such guidelines can complicate things even more:

“Protests erupted in Kazakhstan after gas prices doubled at the very beginning of 2022. This price increase is no coincidence: the government has increasingly intervened in the country’s energy sector in recent years, often to support renewable projects. But there is no such thing as a free lunch, so their support for renewable energy comes at the expense of coal, crude oil and natural gas producers.”

Szamosszegi noted another official policy not directly related to crypto regulation, the “Energy Conservation and Energy Efficiency” law passed in January 2022. This legislation imposed a number of criteria on both energy consumers and producers, such as a duty to register with the state Energy Register for all units that use energy resources that amount to 1,500 or more tonnes of standard fuel per year. In his opinion, it slows down growth in the energy sector, which in turn makes the sector vulnerable to price increases.

Aleksandr Podobnykh, a blockchain cybersecurity and fraud expert and member of the regional Association of Chief Information Security Officers (ACISO), is of a different mind. He told Cointelegraph that while the new taxes could hardly be welcomed by miners, they will help Kazakhstan maintain the sustainability of its energy sector:

“This of course worsens the work of miners. But good for the state. The lines and equipment will be updated – we need to use more cheap and renewable energy.”

While supporting the new tax changes, Podobnykh highlighted a weak point, which appeared already in previous legislative work and which did not disappear with the latest update. In particular, the new amendments have not changed the existing legislation on the tax obligations of individuals who have received capital income from the sale of digital unsecured assets. Taxable income will therefore be calculated as the entire sale price for such an asset without deduction for acquisition cost.

There are also controversies regarding the leasing of mining services. According to current tax guidelines, crypto mining leases will be taxed as income from the rental of real estate. Under these guidelines, the widespread practice of selling hash rate, where the customer rents a certain amount of computing power from a crypto miner, remains without a specific regulatory regime. As Podobnykh explained:

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“It will worry big miners to a greater extent. Cloud miners will also be indirectly affected because this will affect the cost of services proportionally. Certainly not for those who lease facilities in other jurisdictions.”

Nevertheless, even with the aforementioned caveats, the overall combination of taxes and energy prices in Kazakhstan remains relatively attractive – even at the highest mark, 1 kWh will cost miners around $0.067, which is significantly lower than the average of $0.12 per kWh before any taxes. in the US The post-Soviet republic remains perhaps the clearest jurisdiction for miners in the region, and the new tax regime will serve as an acid test for Kazakhstan’s neighbors, Podobnykh believes:

“This is definitely a positive signal for the industry as a whole in Kazakhstan. To some extent, it serves as a pilot zone for the countries of the former CIS and Russia.”