Yesterday, Senators Cynthia Lummis (R-Wyoming) and Kirsten Gillibrand (D-New York) introduced a new bill on digital assets/cryptocurrencies, entitled the “Responsible Financial Innovation Act” (S. 4356). The 69-page bill sets out new standards for regulation of digital assets and provides much needed regulatory clarity.
The bill covers a wide range of topics from taxation of crypto transactions, regulation of crypto exchanges, regulation and disclosure requirements for current and new cryptocurrencies, much-needed stablecoin regulation after the Terra/Luna collapse, and more.
Since the SEC has not approved an ETF holding actual bitcoin, and since bitcoin futures ETFs are not good at tracking bitcoin spot price, we believe that a good way to gain exposure to bitcoin in the meantime is to invest in bitcoin miners since their stock price will often track the price of bitcoin.
This new bill, if passed, will directly and positively impact bitcoin miners and the bitcoin mining industry. We read through the bill and here summarize potential impacts on bitcoin miners:
1. Section 208 of the bill allows bitcoin miners to delay taxable income recognition of their mined coins until they actually sell the coins.
The full text of section 208 says:
“Deferral of Income Recognition for Digital Asset Activities.—In the case of a taxpayer who conducts digital asset mining or staking activities, the amount of income relating to such activities shall not be included in the gross income of the taxpayer until the taxable year of the disposition of the assets produced or received in connection with the mining or staking activities” (Responsible Financial Innovation Actt, p. 11).
This provision for miners would be a great benefit to bitcoin miners in the United States since they would not be taxed on mined bitcoin until they sell the bitcoin mined.
And if miners never sell their mined bitcoin (as many declare themselves to be hodlers), then the mined bitcoin will remain as an asset on their balance sheet and never be taxed. Or miners could strategically sell bitcoin over multiple years to spread out tax payments.
We looked into several miners to see how this provision would have impacted them in 2021:
- Riot Blockchain had $213.2 million in 2021 revenues from mining, hosting, and engineering. After deductions, Riot paid $254,000 in taxes (2021 Riot Blockchain 10-K filing). The new crypto bill might have reduced their tax bill to zero or near zero (since some of their 2021 revenue was from hosting and engineering).
- Marathon Digital had $150.4 million in 2021 revenues solely from mining. After deductions, Marathon paid $23 million in taxes (2021 Marathon 10-K filing). The new crypto bill would have reduced their tax bill to zero since all their 2021 revenue was from mining.
- Cleanspark had $49.4 million in 2021 revenue ($38.8 million from mining and $10.5 million from “Energy hardware, software and services”). After tax deductions, Cleanspark paid zero tax in 2021 (2021 Cleanspark 10-K filing), so they would not have been affected by the new crypto bill.
- Core Scientific had a $682 million deferred tax asset in 2021 (2021 Core Scientific 10-K filing) and thus paid zero tax in 2021, so they would not have been affected by the new crypto bill.
Even though Cleanspark and Core Scientific paid zero tax in 2021, if they ever become profitable, the new crypto bill would reduce their taxable income in future years.
Canadian bitcoin mining companies like Hut 8 Mining, Bitfarms, and Hive Blockchain, and the British bitcoin mining company Argo Blockchain would not be affected by the new crypto bill since they do not operate in the U.S.
By delaying income recognition of mined bitcoins until the coins are sold, the new crypto bill would reduce taxable income for U.S. bitcoin mining companies that hodl and give them an edge over rivals in Canada, the UK, and elsewhere.
2. Section 806 of the bill directs the Federal Energy Regulatory Commission (FERC) to provide an annual report on Energy Consumption for the mining of digital assets.
2.1. The FERC report will analyze the energy consumption of mining particularly as it relates to its impact on “national, regional, and local energy prices” and on “baseload power levels.” FERC will probably discover what few know about bitcoin mining: against misinformed critics, bitcoin mining can actually help to lower energy prices by using electricity that would otherwise be wasted during off-peak times. This would increase baseload power levels, which will help strengthen the electrical grid during peak demand. And during such periods of peak demand, bitcoin miners can shut off and allow the grid to prioritize others.
There is a lot of criticism against bitcoin because of its electricity usage and supposed negative impact on the environment. These criticisms have been well answered by bitcoin advocates (for example, see NYDIG’s Bitcoin Net Zero report).
An official government report dispelling myths about bitcoin's energy usage and environmental impact could carry more weight in convincing skeptics that bitcoin mining can help the transition to renewable energy, can strengthen electrical grids by increasing baseload power, and can reduce energy costs by using electricity "wasted" during off-peak times.
2.2. The FERC report will also analyze “the use of renewable energy sources, including use of nonrenewable sources that would otherwise be wasted, and [produce] a comparison of digital asset market energy consumption with the financial services industry and economy as a whole.”
The mention of using "nonrenewable sources that would otherwise be wasted" seems to be a reference to bitcoin miners using excess natural gas from oil wells. In these situations, the excess natural gas is usually burned (or flared), which is bad for the environment. But since bitcoin mining can be set-up anywhere, bitcoin miners can make use of such excess natural gas and help reduce the need to burn excess natural gas that harms the environment.
The comparison of energy usage between mining digital assets and the financial services industry will be especially illuminating since a careful comparison has not really been carried out. FERC will likely find that the financial services industry uses just as much, if not more electricity than bitcoin mining.
3. Section 202 of the bill corrects the ambiguous definition of “broker” in the 2021 Infrastructure Investment and Jobs Act to exclude miners.
The 2021 Infrastructure bill defined a “broker” as “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person” (H.R. 3684, p. 2420). All such “brokers” are subject to IRS reporting requirements for capital gains/losses on cryptocurrency transactions; however, the ambiguous definition of “broker” would include bitcoin miners since miners process transactions.
The 2021 Infrastructure bill reporting requirements would actually be impossible for bitcoin miners to comply with since miners process transactions, but have no way of calculating capital gains/losses and no way of reporting such to the people who initiated bitcoin transactions.
The new crypto bill defines “broker” as “any person who (for consideration) stands ready in the ordinary course of a trade or business to effect sales of digital assets at the direction of their customers” (Responsible Financial Innovation Act, p. 7). This much better definition would clearly exclude miners since they do not process the sale of digital assets “at the direction of their customers.”
Conclusion: The new crypto bill would benefit U.S. miners
At this point, it is unclear if the Lummis-Gillibrand crypto bill will pass anytime soon. But if it does, it would benefit bitcoin miners by reducing their taxable income. If the Federal Energy Regulatory Commission produces positive reports on how bitcoin mining is helping energy markets and accelerating the transition to renewable energy, such reports will improve the image of bitcoin among the general public. And by explicitly excluding miners from the definition of a digital asset “broker,” the new crypto bill helps miners avoid unnecessary and impossible-to-obtain reporting requirements.