VAT Rules for Cryptocurrency Mining in the UAE
The cryptocurrency-related transactions have been outnumbered in the recent past, bringing significant attention to tax implications around the globe. In the UAE, the Federal Tax Authority (FTA) issued clarification related to the VAT treatment for cryptocurrency mining through the public clarification of VATP039, which was issued on 14 January 2025. In this blog, let us dive and understand the intricacies of the application of VAT for cryptocurrency mining activities, and how the VAT is applied to businesses and individuals engaged in Cryptocurrency mining activities.
Understanding Cryptocurrency Mining
In the process of Cryptocurrency mining, miners are involved in using specialized computers which are known as mining rigs. The miners are validating the transactions which are happening through blockchain for specific currencies like Bitcoin and Ethereum. The miners validate the blockchain transactions through solving cryptographic equations and successful miners are rewarded with cryptocurrency tokens in proportion to their contribution of computational power to the network.
There are two primary scenarios in cryptocurrency mining:
- Mining for personal accounts (own accounts) where the rewards are received from the blockchain network to their private wallets.
- Cryptocurrency mining on behalf of others against the fee for the services provided.
These scenarios differ significantly in their VAT implications.
VAT Treatment of Cryptocurrency Mining for Personal Accounts
While there are no services involved at the time of conducting cryptocurrency mining for personal accounts, FTA has clarified through VATP039 that such activities are not considered taxable supplies for VAT purposes and will have an impact out of the scope of UAE VAT. The reasons behind VAT being out of scope include;
- There is no identifiable recipient of services of the cryptocurrency mining activity.
- No close relationship between the cryptocurrency mining activity and the reward received in the form of digital tokens.
- The reward is not guaranteed for such services and highly depends on the solving of cryptographic equations.
Keep in mind that, while doing cryptocurrency mining for a personal account, there could be taxable expenses incurred by the miner such as utility bills, cost of purchase of hardware etc. which are not recoverable since there is no taxable supply recorded against the taxable expenses. This understanding is very crucial for individual cryptocurrency miners whose input VAT cannot be recovered for cryptocurrency mining for a personal account.
VAT Treatment of Mining Services Provided to Others
When mining activities are conducted on behalf of another person or entity in exchange for a fee, they qualify as a taxable supply of services. In this scenario:
- The mining service provider has an identifiable customer.
- The fee received is considered as consideration for the taxable supply.
If the recipient of these services is a UAE resident, the standard VAT rate of 5% applies. However, if the services are provided to a non-resident and meet the requirements outlined in Article 31 of the Executive Regulation, they may be zero-rated. For example, the supply could qualify for zero-rating if the services are performed for a non-resident customer who is outside the UAE during the time of service delivery.
Input Tax Recovery
The eligibility for input tax recovery depends on the nature of the mining activity:
- Mining for Personal Accounts: Input tax recovery is blocked for cryptocurrency miners for personal accounts since the activity is not considered a taxable supply
- Mining Services for Others: While providing cryptocurrency mining services to a third party, the place of supply is considered as UAE and depending on the location of the customer, VAT treatment can be either standard-rated or zero-rated. In both cases, the input VAT incurred for the taxable supplies can be recovered by the cryptocurrency miners to the extent it is related to making taxable supplies. These expenses can be the purchase of hardware devices, rent, utility bills etc. The taxable person must provide relevant documents while claiming the input tax incurred
VAT Obligations for Non-Resident Mining Service Providers
If the services of cryptocurrency mining is provided by a non-resident entity to UAE-based customers, such non-residents shall register for UAE VAT, if the services are provided to non-VAT registrants in the UAE. Always remember that there is no registration threshold applicable for non-residents (voluntary and mandatory registration threshold for VAT registration) and they have to register for VAT from the first supply of services in the UAE.
VAT obligation of UAE taxable person while receiving the crypto mining services from outside UAE
The UAE VAT registrants must account for the VAT while receiving crypto mining services from outside the UAE. The VAT is required to be accounted for under the Reverse Charge Mechanism (RCM)
Key Takeaways for Cryptocurrency Miners in the UAE
- Identify Your Mining Scenario: The applicability of UAE VAT depends on the recipient of the crypto mining services. If the service recipient is self-account, it is not considered as taxable supplies whereas if the service recipient is a third party, UAE VAT would be applicable.
- Maintain Comprehensive Records: While the guide clarified that input tax can be recovered against the crypto mining services provided to the third party, it is crucial to keep the relevant records for such input tax claimed ( Ex:- Invoice)
- Understand Zero-Rating CriteriaWhile determining the VAT rate, either standard-rated or zero-rated, ensure compliance in order to avoid potential complications in the future.
- Consult a Tax Expert: Given the complexity of VAT regulations in the UAE, professional advice is invaluable for ensuring compliance and optimizing tax efficiency.
Conclusion
As the cryptocurrency landscape evolves, so do its tax implications. The FTA's clarification on VAT treatment for cryptocurrency mining provides a framework for compliance, enabling miners to navigate the regulatory environment effectively. Whether you’re mining for personal gain or offering services to others, understanding these VAT implications is critical to managing your tax obligations in the UAE.
To learn more about VAT Implications of Cryptocurrency Mining in the UAE, book a free consultation with one of the Flyingcolour team advisors.
Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.