The mining tax law vacuum

Mining activities are not very popular in Italy and still represent a niche sector. The tax legislation does not yet provide a clear overall picture. 

What tax obligations are miners subject to in Italy? 

This is a recurring question, because in our country, in the face of a chronic lack of tax rules that afflict the crypto sector in general, mining is one of the activities least considered and, until now, never even addressed in our tax documents.

It is commonly believed that, due to high energy costs, mining in Italy is not very convenient and therefore not very popular. In reality, this is not the case at all.

According to Dr. Mazza, Director of FCM /AsicMining.it, a company specializing in the sale and maintenance of mining equipment, this activity in Italy, despite being a niche sector, is growing strongly and has important opportunities on the horizon. This is clearly perceived on the basis of fast-growing sales. Mazza states that:

“Many miners compensate for the high energy cost by turning to energy-efficient algorithms, such as Daggerhashimoto (ETH), Scrypt (LTC/DOGE) or Equihash (ZEC). Bitcoin mining is also quite active in Italy. There are many cases where mining is adequately profitable, despite the cost of electricity. For example, this applies to producers of renewable energy: the fee for feeding energy into the grid is often much lower than the equivalent value of using the same amount of energy to mine cryptocurrencies. Then there are cases such as industries that produce electricity as a side effect of their production (mining plants, refineries, etc.), or energy-intensive companies that benefit from lower prices. Then there are also those who, needing to heat cold rooms, use the heat released by ASICs. Our company, in partnership with Provides Metalmeccanica of Latina, is also developing a very innovative product which, thanks to the use of patented technology, can heat hot water by mining Bitcoin. The performance of the system looks extremely interesting and within a few weeks there will be the first working prototype ready”.

So, if mining is not such a rare activity in Italy, it is worth trying to assess the situation, especially since there are many issues to address.

First of all, from the fiscal point of view, there is a big difference if the mining activity is carried out on a purely personal basis or if, for the modalities with which it is carried out, it can be qualified as a business activity.

Tax framework for companies 

If mining is carried out as a business activity, then the matter is relatively simple. The proceeds from the sale of mined currencies constitute business income subject to income tax to the extent that varies according to the rates reached during the tax period, and net of production costs.

This means that the costs incurred to produce the mined currencies can be deducted from the taxable income (i.e. from the gross receipts), provided that they are inherent (i.e. strictly related to the business activity) and clearly documented. 

In terms of VAT, sales of virtual currencies, since they are means of payment, should not be subject to VAT, also in light of the CJEU’s judgment of 22/10/2015, in Case C-264/14, known as the Hedqvist Judgment.

Tax framework for natural persons

The issue becomes more complicated if cryptocurrency mining does not constitute a business activity. In this case, the tax framework for revenues accruing as a result of the conversion of mined cryptocurrencies into legal tender should apply the same rules and principles that apply to revenues earned by individuals (not trading or exchange companies) as a result of exchange transactions, i.e. the purchase and subsequent resale of cryptocurrencies.

This means, first and foremost, that the same important and as yet unresolved issues relating to the taxability of capital gains from cryptocurrency trading arise in respect of such income.

Equivalence with income from foreign currency

As is well known, according to the interpretation of the Italian tax authorities, expressed in a series of answers to queries (the first of which is the infamous resolution of the Revenue Agency of 2 September 2016, no. 72/E), cryptocurrencies, for the purposes of tax treatment, should be equated with foreign currencies. 

According to this thesis, therefore, the capital gains obtained from the conversion of cryptocurrencies, would generate taxable income as miscellaneous income (art. 67 co. 1 lett. c-ter of the TUIR), subject to a replacement tax equal to 26% of the accrued capital gain. The tax is triggered if the countervalue of the cryptocurrencies held in all the wallets exceeds the deposit threshold of €51,645.69 for seven working days in a row (art. 67 co. 1 ter of the TUIR).

Warning: this interpretation, although it has been reiterated on several occasions by the Revenue Agency, is strongly contested by many insiders.

The weakness of this interpretation lies in the equating of virtual currencies with foreign currencies, because this axiom seems to be contradicted both by the Hedqvist Judgement, which has already been mentioned, and by Article 2 of Presidential Decree 148/1988 (Consolidated Law on Currency) in which a legal definition of the concept of foreign currency is given, in which it is not possible in any way to include the concept of virtual currency, and consequently of cryptocurrency.

Now, if the criticality of this axiom is valid for the capital gains that accrue as a result of the operations of purchase and resale of cryptocurrencies, it is also valid in the same terms for the capital gains that can accrue as a result of the transfer of cryptocurrencies that private individuals find in their wallets, including as a result of mining activities.

That said, let’s imagine accepting the reasoning of the Italian tax authorities. In this perspective, if a private individual accumulates in his wallet cryptocurrencies that are the result of mining activity and then converts them into legal tender, if the countervalue of the cryptocurrencies exceeds the threshold of €51,645.69 for seven days, applying this reasoning, one would think that he would have to pay tax on the accrued capital gain. 

One of the problems, therefore, is determining the amount of the capital gain. It is clear that if I buy a cryptocurrency at 10 and sell it at 15, my capital gain will be 5 (regardless of whether this capital gain is taxable or not). 

But if the converted cryptocurrencies are the result of mining activities, it is natural to assume that the capital gain corresponds to the difference between the acquisition value (which would be equal to 0), and the conversion value. If this value is 15, then it will constitute a capital gain in full.

However, there is another problem. Mining consists in the elaboration of a series of mathematical operations of a probabilistic nature. In other words, it is by no means certain, and in fact it is extremely random, that within a given period of time, one succeeds with certainty in mining a block of the chain. 

The component of chance and randomness is such that there are those who argue that any income accrued can be qualified in the same way as income from winning lotteries, prize competitions, games and betting, governed by art. 67 paragraph 1 letter d) of Presidential Decree 917/1986.

If this hypothesis were correct, the taxation regime would change completely, because the relevant income would no longer be taxable at 26% but would enter for the full amount into the taxpayer’s taxable base.

The definition of mining activity

Another problem. How to determine when the mining activity constitutes the exercise of a business activity (such as to generate business income) and when, instead, carrying out an activity that generates a different income, whether it is in the form of capital gains of a financial nature (art. 67 co. 1 lett. c – ter) or in the form of income from winning lotteries, prize games, etc. (art. 6. Co.1 lett. d)?

The Civil Code (art. 2082 Civil Code) defines an entrepreneur as anyone who professionally carries out an organized economic activity for the production or exchange of goods or services. The characteristic elements, therefore, are represented by how professionally the activity is carried out. 

That is, the fact that the activity is carried out on a continuous and regular basis, not episodically and occasionally. Another indicator is the existence of some form, even minimal, of organization.

In the specific case of mining, even when it is carried out at a minimum and, so to speak, “small-scale” level, it postulates, by definition, both that it is exercised with continuity, and that it is based on a minimum of organization, established, at the very least, by the computer or computers used to mine the blocks. 

It is clear that if a private individual who ordinarily does other things in life simply has an ASIC running night and day in his basement, he is reasonably not carrying on a business activity. However, theoretically speaking, the elements are in place to claim that he is doing so.

This implies that, in the event of controls, that private individual risks being charged for carrying out a totally unreported business activity.

So, while more and more complex anti-money laundering regulations are being continuously churned out, targeting every kind of crypto activity, on the fiscal front there is a pneumatic vacuum and the glaring gaps and contradictions of the system can be the source of disorientation and serious inconvenience for taxpayers, even when it comes to mining.

Will Italy ever see the light of day with an organic fiscal discipline on cryptocurrencies and crypto assets?