UAE reduces tax burden; IMF seeks high taxes for BTC miners

The United Arab Emirates has exempted digital asset holders from paying value-added tax (VAT) on their transactions, extending the same exemptions enjoyed by traditional financial services to the nascent sector. 

On the other hand, the International Monetary Fund (IMF) calls for higher taxes for BTC miners, which could raise the electricity prices for the sector by up to 85% to curb emissions.

UAE extends VAT exemptions to digital assets 

In a recent update, the UAE’s Federal Tax Authority (FTA) revealed that it had amended VAT regulations to exempt the transfer and conversion of digital assets. Effective November 15, the Cabinet approved the amendments earlier this year, as revealed by the global accounting giant PwC. 

The exemptions cover other digital asset-related services, including managing investment funds focusing on digital tokens. However, they don’t cover financial securities or the digital representation of fiat currencies.

The tax exemptions will be treated as effective from January 2018. As such, virtual asset service providers (VASPs) in the UAE can claim input tax recovery for the VAT they have paid for those six years, which PwC says can be done through the FTA’s voluntary disclosure process.

With the VAT exemption, the UAE is finally classifying digital assets “in the same bucket as traditional financial services, several of which are already exempt from VAT. This legitimizes VAs,” says Ankita Dhawan of Metis Institute, an English boutique advisory. 

The UAE joins the European Union, which scrapped VAT for digital asset transactions nearly a decade ago. In 2015, the Court of Justice of the European Union ruled that the exchange of a digital asset for fiat is exempt from VAT in a case referred by a Swedish court. However, some services, such as mining and wallets, could attract taxes depending on the individual country’s laws.

The United Kingdom followed the EU’s lead and exempted digital asset exchanges from VAT, classifying them as a supply of a financial service, which is exempt from VAT by law. Australia and Singapore also exempt the exchange of digital assets for fiat from the Goods and Services Tax (GST). Other jurisdictions where digital asset exchange is exempt from GST, VAT, or consumption tax include Canada, Switzerland and Japan.

IMF: Tax BTC miners to cut down carbon footprint

While the UAE is reducing the tax burden on the digital asset sector, the IMF is calling for higher taxes for BTC block reward miners and artificial intelligence (AI) data centers, claiming that their energy consumption and carbon footprint are surging at a concerning rate.

In a blog post, IMF executives Shafik Hebous and Nate Vernon-Lin blasted digital assets and AI for being ‘power-hungry.’ They claimed that one BTC transaction consumes the same energy as an average Pakistani does in three years, while a ChatGPT query consumes 10 times more energy than a Google (NASDAQ: GOOGL) search.

The IMF claimed that its research had shown that digital asset miners could generate 0.7% of all carbon dioxide emissions by 2027, while data centers could hit 1.2% of the global total or 450 million tons.

“The tax system is one way to steer companies toward curbing emissions,” the global financier says.

It suggested a direct tax of $0.047 per kilowatt hour for BTC miners, which it believes would bring them up to global standards. If other factors are considered, such as the impact of air pollution on the health of the surrounding communities, this tax should hit $0.089. This would translate into an 85% increase in the average price of electricity for miners. Conversely, it would result in $5.2 billion in global revenue and a reduction in annual emissions by 100 million tons.

With electricity accounting for up to 80% of the miners’ total costs, this would deal a big blow to a sector that has already been struggling, with most public miners recording losses in the first half of the year.

While advocating for higher taxes for miners, the IMF acknowledged that in many jurisdictions, the situation is the opposite, with miners enjoying generous tax exemptions and other financial incentives.

In Texas, for instance, the Electric Reliability Council of Texas (ERCOT) has faced backlash from residents and legislators for cutting deals with BTC miners to compensate them for reducing their energy consumption in peak demand periods. In one instance, ERCOT paid Riot Blockchain over $31 million not to mine.

Beyond taxes, the IMF advocated for “credits for zero-emission, bilateral power purchase agreements, and potentially renewable energy certificates.”

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