On Feb. 4, the Department of Finance introduced draft proposals to the Excise Tax Act related to cryptocurrency mining and goods and services tax (GST)¹. The purpose of these draft proposals is to clarify that crypto asset mining would generally not be considered a “supply” for GST purposes. This means that the cryptocurrency miner would not be required to collect GST on consideration received and would not be allowed input tax credits on expenses incurred related to mining activities.

These draft proposals, which have an effective date of Feb. 5, 2022, still need to go through parliamentary approval and receive Royal Assent before becoming law.

Assuming there are no changes to the draft proposals resulting from the consultation period (which ended on April 5), we can expect to see new section 188.2 added to the Excise Tax Act (ETA).

This proposed new section of the ETA consists of the following five subsections:

1. Definitions:
   • Crypto asset,
   • Mining activity, and
   • Mining group operator
2. Acquisition for mining activities
3. Use for mining activities
4. Remuneration for mining activities
5. Exception

Definitions

The following three defined terms are integral to the application of the proposed legislation.

• Crypto asset is defined as a digital representation of value that exists only at a digital address of a publicly distributed ledger.
• Mining activity means the following activities in respect of a crypto asset:
  • Validating transactions and adding those transactions to the publicly distributed ledger;­­­
  • Maintaining and permitting access to the publicly distributed ledger; and
  • Allowing computing resources to be used for the purpose of, or in connection with, performing either of the above activities. (This means that a person who simply allows their computing resources to be used by another person to perform validation, maintenance and permission of the publicly distributed ledger will also qualify as being engaged in a mining activity.)
• Mining group operator, commonly referred to as a mining pool, is a particular person that carries out mining activities on behalf of a group of persons and shares any fee, reward or payment generated through the mining activities with that group.

Acquisition or use for mining activities

The acquisition or use of property or services in connection with mining activities is deemed not to be in the course of a commercial activity resulting in the denial of the respective Input Tax Credit (ITC) for any GST paid. This denial of ITCs is not dependent on whether or not the person actually receives a fee, reward or payment, or any other form of remuneration, as a result of performing the mining activities. 

Remuneration for mining activities

Money, property (i.e., Bitcoin) or a service (“mining payment”) received as a fee, reward or payment for the performance of mining activities is deemed not to be a supply to the recipient miner. As a result, the person carrying out the mining activities would not be required to collect and remit GST on the remuneration received.

Where all or part of a mining payment is via property (i.e., Bitcoin) or a service to the recipient miner, the mining payment from the payor is also deemed not to be a supply. This provision ensures that any mining payment consisting of property or service, which would be considered a barter transaction, is also deemed not to be a supply. 

Exception

These draft proposals which deem no supply to have occurred, don't apply in respect of a mining activity to the extent that the mining activity is performed by a particular person for another person where this other person meets the following two conditions:

1. The other person is not a mining group operator in respect of a group of persons that includes the particular person; and
2. The identity of the other person is known to the particular person.

This exception can apply where a token ecosystem is created by an entity for a specific purpose and that entity establishes a known administrator to compensate miners for validating, maintaining and permitting access to the token's publicly distributed ledger. Typically, these miners are compensated with the same token they are mining. If this administrator is not a mining group operator, then the mining payment would be considered a taxable supply subject to GST. This means that both the recipient of the mining payment and the payor of the mining payment have a taxable supply to contend with.

If you are involved with cryptocurrency mining, you need to understand the tax implications of your operations. Please read this article for more information related to income tax and cryptocurrency mining and contact your Baker Tilly advisor.