Rumors of rectification in the mining industry are resurfacing: real-name registration is easy but tax calculation is difficult

As the upstream production link in the field of cryptocurrency, miners and mines have always been in an unusually low-key state. In the downturn of the market, many projects broke their issuance prices, ran away, and blockchain companies were on the verge of bankruptcy. The only thing that was running day and night was the mining machine.

Recently, a piece of news that "formal mines in Xinjiang and Guizhou are subject to tax and real-name inspections" has brought the mining circle back into the public eye.

Since 2017, there have been reports of supervision of mining farms, mostly focusing on electricity usage and legal construction of the site. After the news of the "tax and real-name inspection" appeared, many people operating Bitcoin mines in Xinjiang told Fengchao Finance that they had not received any notification from government departments.

The tax payment of traditional enterprises and the real-name system of cryptocurrency trading platforms have basically become common sense, and the real-name system and tax payment of customers of related mining companies have also become topics of concern to the outside world.

Some formal mining farm operators said that they have real-name contracts with their customers and KYC is not difficult, but the taxation of cryptocurrencies still faces confusions such as tax calculation methods and fluctuations in the valuation of Bitcoin against legal currency.

Many industry insiders believe that taxation and real-name registration may be opportunities for mining sites to become compliant, and are also a necessary path to expand the market and promote the healthy development of the industry.

The mines in Xinjiang and Guizhou are rumored to be "rectified", but the operators say it is "exaggerated"

On November 11, some media reported that since November 5, regular mining farms in Guizhou, Xinjiang and other places have been shut down for rectification and are subject to tax and real-name inspections. "This rectification is a joint law enforcement action by the government, which checked the tax information, capital transactions and customer information of the mining farms." The report also mentioned that some mining farms were required to sign a network information security work guarantee, which included the implementation of the latest real-name system standards. Customers who have not completed the task will affect the reinstallation, restart, migration in and out of the data center and other work.

The news involved departments such as taxation and public security. Fengchao Finance visited the official websites of relevant departments in Xinjiang and Guizhou, but found no official documents.

Regarding this news, Fengchao Finance interviewed several mining operators with business licenses in Xinjiang. The interviewees all said that they and their familiar colleagues had not received any relevant rectification notices.

At the same time, there are reports that Bitmain has recently deployed 90,000 mining machines in Xinjiang. If rectification is required, the computing power will be affected. In this regard, a person close to Bitmain revealed to Honeycomb Finance that the production and sales of the company's mining machines are legal and compliant, the company has paid taxes in full, and has not received any rectification notice.

This year, there have been constant reports of rectifications on Bitcoin mines, and the low-key mine operators often leave the outside world with a tense impression of being "panicky".

"The news has been exaggerated," said a mine operator, adding that if there is any rectification, it may only be targeted at a few mines in certain places, rather than a large-scale action.

Regarding the rumors about taxation and real-name registration, most mining farm operators believe that most of the mining farm income is in digital currency, and the existing tax calculation system is difficult to calculate value-added tax and personal income tax. Even if there is a rectification plan, the relevant departments may be conducting investigations and inspections on tax management. "If there is a tax law for digital assets, it is national and global, and it should not be a local law."

Formal mining farms have real-name contracts and do not exclude KYC

Although the operators of mining farms are calm, there has been constant news about the regulation of Bitcoin mining farms, especially in Xinjiang, which has abundant electricity resources and many mining farms. Since 2017, relevant departments in Xinjiang have successively issued a number of government documents and notices on mining farm operations.

On June 12, 2017, the Xinjiang Uyghur Autonomous Region Economic and Information Commission issued a "Notice on Prudent Support for Bitcoin Mining Enterprises." The document pointed out that Bitcoin mining enterprises, in addition to consuming a large amount of electricity, have basically made no contribution to local social and economic development (including taxation).

On January 4, 2018, the Office of the Leading Group for Special Risk Rectification of Internet Finance in Xinjiang issued a document titled "Notice on Monthly Reporting of Information on Virtual Currency "Mining" Enterprises". The notice pointed out that enterprises will be guided to exit the "mining" business in an orderly manner, and at the same time, the basic situation of Xinjiang mining enterprises and the exit guidance will be reported monthly.

On July 20, 2018, the Xinjiang Uygur Autonomous Region Economic and Information Commission issued the "Notice on Clearing Out Illegal Electricity "Mining" Enterprises". The notice requires that the responsible entities for clearing out illegal electricity "mining" enterprises are power generation enterprises, and the clearing out of illegal electricity "mining" enterprises should be completed before August 30, 2018. The scope of the clearing out is: 1. Illegal electricity "mining" enterprises that have not handled the procedures for business registration, tax registration, social insurance and five insurances in accordance with national laws and regulations; 2. Illegal electricity "mining" enterprises that have not signed electricity contracts with local power supply companies.

Unlike previous rectifications on mine electricity usage, industrial and commercial procedures, and human resource management, this news focuses on the real-name system and tax management, which is not without reason.

Mining operations involve legal currency costs such as electricity bills and labor costs, while mining revenue is mainly in Bitcoin, which involves the issue of monetization, and Bitcoin monetization requires an over-the-counter (OTC) point-to-point monetization channel. Due to the large amount of coins traded, miners have a fixed OTC trading channel.

Although many OTC traders will conduct KYC on their own to ensure transaction security, it is impossible to rule out the possibility of inadequate KYC and the risk of money laundering. As a mining farm in the production of new coins, real-name supervision is necessary.

Taxation is also an issue that formal mining farms cannot avoid. In theory, mining farms operated in the form of a company cannot escape paying corporate value-added tax, business tax, and employees' personal income tax, etc. However, my country has defined Bitcoin as a "specific virtual commodity" with asset attributes.

Wang Yunjia, founder of Fengyu Technology, who has long been concerned about legal issues related to cryptocurrency, believes that the regulatory policy for Bitcoin mines may become stricter, and that taxation and compliance of mines are also future trends. "There are no cryptocurrency trading platforms in my country now, but well-known trading platforms around the world are all implementing real-name systems, and real-name systems for mines are also future trends."

In the field of cryptocurrency, trading platforms were the first to implement the real-name system - KYC (know-your-customer, an identity recognition system implemented by financial institutions). Since the early development of cryptocurrencies represented by Bitcoin was small in scale and not subject to government supervision and legal constraints, cryptocurrency trading platforms did not have strict requirements for KYC at first.

However, in the past few years, the Bitcoin market has been improving, the number of cryptocurrency traders has increased sharply, and trading chaos has continued to occur, with frequent incidents of fraud and asset theft, and even illegal activities such as purchasing contraband and money laundering. With the intervention and promotion of financial regulatory authorities around the world, KYC has gradually become a requirement that cryptocurrency trading platforms must implement.

At present, mainstream trading platforms and wallets with trading functions must strictly implement KYC. In countries with strict supervision such as Japan and the Netherlands, service providers with insufficient KYC review and money laundering risks will be stopped.

Unlike the transaction process where KYC is generally implemented, the real-name system for mining farms has not yet begun, and there are no clear legal regulations. The first to implement the real-name system in the mining circle was the well-known mining machine manufacturer Bitmain.

In August this year, Bitmain's Antminer sales channel began requiring customers to provide identification documents (such as passports and driver's licenses) and address confirmation before purchasing Asic or other mining equipment.

Bitmain implements real-name system for purchasing mining machines

Regarding the real-name system, the operator of a mining farm that provides mining machine hosting services said that the government departments do not have a mandatory requirement for the real-name system, but the mining farm and each customer must sign a contract with their real name. This is a necessary procedure for normal operations. There is currently no policy requiring customer information to be reported.

An industry insider who wishes to remain anonymous does not reject KYC. He believes that the entire mining farm may implement KYC in the future. “On the one hand, it can effectively prevent money laundering risks. On the other hand, after the mining farm has KYC, the operation can be formalized and the market effect will increase. In the past, many people hesitated about whether to enter the market due to regulatory risks. Once the mining farm passes the KYC required by the relevant departments, the formalized management will dispel their concerns.”

Most of the mining farms’ income is in Bitcoin, and it is difficult to define the tax standard

As more and more countries begin to regulate cryptocurrencies, tax policies, as an important means of supervision, have been put on the agenda early by some countries. The United States, Japan, Thailand and other places have begun to explore the taxation of cryptocurrency assets.

Currently, China prohibits the establishment of cryptocurrency trading platforms, so there is no tax issue for exchanges. However, mining farms that require electricity and space to operate mining machines are still within the legal framework of ordinary commercial entities.

It is understood that the main compliance procedures and documents for establishing a mine in Xinjiang include the conversion of agricultural land into commercial land (filing), company registration, tax reporting, factory construction approval, and power supply agreements with the power grid. Most of the registered companies in the mines are big data, cloud computing, and Internet companies.

Among all the operating procedures, taxation is one of the parts that the regulatory policy is not yet clear. A mining farm operator in Xinjiang said that the expenses of the mining farm are mainly construction costs, operation and labor costs, and the income is mainly in digital currencies such as Bitcoin and Bitcoin Cash.

“There is no such thing as mining farms not paying taxes. Bitcoin is recognized as a commodity, but there is no unified tax calculation standard for how to pay taxes for this type of asset,” said the mining farm operator mentioned above.

Wang Yunjia believes that mining farms are the source of incremental growth and the source of new coins, and that they must be regulated. "If nothing else, the 'tax obligation' alone must be regulated. In addition, the country is very concerned about currency exchange, cross-border remittances and foreign exchange losses, and money laundering risks are also a very important part."

Some miners have already paid attention to the tax issue. A miner named Allen Feng believes that it is difficult to judge whether to pay taxes before the regulatory policy is released, "because the current tax law basically requires that taxes be paid only when net legal currency income is achieved. If the coins obtained from mining are not sold, there is no net legal currency income, and the state cannot collect taxes; secondly, cryptocurrency has a strong anonymous transaction nature, and it is basically difficult to define the income from mining in the early stage; even if the tax law requires the mine to pay taxes, even if there was income before, the currency price fluctuates, and the income is difficult to define and trace."