How much tax would Bitcoin mining generate for the US government?

Tax revenue from bitcoin mining companies could provide a sizable windfall for the U.S. government.

Crypto supporters were taken aback last July when an infrastructure bill submitted to the U.S. Congress claimed that it could raise $28 billion from crypto investors by applying new information reporting requirements to exchanges and other parties. In reality, it is very difficult to calculate how much tax crypto investors should pay based on their capital gains.

In theory, the Internal Revenue Service (IRS) can look at every transaction on every blockchain to see the profit and loss of every wallet or account. From there, the IRS can calculate the amount of tax it can levy on-chain gains. However, this raises the question of whether these assets are sent from one wallet to another with the same owner, which may not make it a taxable event. On top of that, it is difficult to get good information from exchanges to calculate the amount of off-chain gains the IRS can levy. In practice, this collection and assessment process is a mess.

If the U.S. government wants to raise money by taxing cryptocurrencies, it could consider encouraging Bitcoin miners to set up shop. Doing so could potentially bring in tax revenue from companies setting up mining operations. We will estimate the amount of revenue the U.S. government could receive from Bitcoin mining companies.

frame

We developed a relatively simple estimate of Bitcoin mining profitability using an open source model developed by Galaxy Digital to estimate the cost of mining Bitcoin and apply simplifying assumptions to represent the entire Bitcoin market.

Before we briefly outline the approach, a few points are worth mentioning: Currently, there are several publicly traded Bitcoin mining companies (Core Scientific, Hut 8, Argo Blockchain, Riot Blockchain, and Marathon Digital). Publicly traded companies are required to share financial information, and these reports show that Bitcoin mining companies, in general, do not pay much in taxes.

In fact, some companies book losses on their income statements and pay no taxes at all. Startups — namely bitcoin miners — are often unprofitable because they expect to spend money building their operations.

We also want to standardize accounting methods that allow companies to minimize their tax liabilities, primarily through noncash charges such as stock-based compensation and certain types of depreciation. Doing so can make companies appear less profitable than they really are.

The profitability of Bitcoin mining does not tend to zero, and businesses need to make money over the long term to stay in business, so we assume that at least in the short to medium term, Bitcoin miners will not lose all profitability.

Model

Our calculations rely on Galaxy Digital’s model for a simple reason. We know roughly how much Bitcoin miners will receive in revenue per year. The Bitcoin protocol is designed in such a way that a block is mined approximately every 10 minutes, so we can safely say that miners will receive 328,500 Bitcoins per year plus transaction fees, which is nominally about 3% of the current block reward.

Therefore, the main focus of determining profitability should be estimating costs. The three main expenses we want to estimate are cost of revenue (primarily electricity costs for mining); selling, general and administrative expenses (general costs such as marketing and rent); and depreciation (a non-cash but real expense that represents the wear and tear of the machines used for mining).

The main cost drivers for Bitcoin mining are a function of electricity consumption and price. Galaxy’s model calculates the cost of producing Bitcoin based on the specifications and performance of 18 different models of ASIC miners. These machines consume different amounts of electricity at different efficiency levels. Each miner has different levels of profitability based on the cost of electricity per kilowatt-hour. Our base case assumption is an electricity cost of $0.06 per kilowatt-hour.

Next, in this machinery-intensive business, mining companies that purchase ASICs need to deal with a lot of depreciation.

Then, these companies have other costs associated with SG&A, which, by comparing public companies, is estimated to be around 12.5%.

Finally, we include "other expenses" at 3.5% of revenue to reduce the potential for overstating profitability.

result

Below we present our results in a two-way chart, using different scenarios adjusted for Bitcoin price, Bitcoin’s total hash rate, electricity costs, and the U.S. share of global hash rate. The numbers in the chart represent the federal tax revenue that mining companies bring to the government each year, assuming a 21% federal corporate tax rate.

• Global Bitcoin hash rate reaches 200 EH/s

• Electricity cost is $0.06 kWh

• The United States has a 30% share of the global hash rate

• 21% federal corporate tax rate

Bitcoin miners have an estimated pre-tax profit of $1.4 billion and a tax bill of $299 million. This is shown in the middle of each table below. All other numbers in the table represent estimated taxes if these inputs change. For example, if the Bitcoin price is $60,000 and the hash rate is 250 EH/s, the taxes paid to the U.S. government would be $335 million.

Of course, this result is for reference only. But at the very least, Bitcoin mining represents a potentially profitable industry that could generate more tax revenue for the government.

By George Kaloudis From Coindesk

Compiled and edited by Amy Liu