How Will New Taxes on Bitcoin Mining Impact Web3?
The Department of the Treasury recently released its revenue proposal for 2024 which included a unique emphasis on digital assets and how they are produced, suggesting a new tax on the electricity used to mine digital currencies, such as Bitcoin and Dogecoin.
While the Biden administration has been transparent about the framework they’ve been developing in order to better regulate cryptocurrencies and the web3 industry, the suggested tax on mining resources came as a surprise; but it could be less harmful than many might expect.
The new tax proposal
According to the proposal, the initial taxation plan would begin in 2024 with taxation rates on electricity used by mining companies starting at 10%. The tax rates would then increase to 20% the following year and then cap itself at 30% after that.
Cryptocurrency miners would also be required to report the electricity they are using, stating its type and the value associated with it, with additional emphasis placed on electricity that is acquired off-grid.
Why is mining electricity being taxed?
Despite seeming random, the Department of the Treasury provided a few specific reasons for the proposal, claiming that bitcoin mining’s effect on climate change is a leading cause; while arguments for using clean energy to mine bitcoin in the United States have been brought up, the Biden administration has made it a point across all industries to begin finding new ways to reduce the amount of greenhouse gas being produced.
However, a more practical concern is the demand that many of these bitcoin mining operations place on electrical grids within the country, suggesting that it could interfere with energy costs for private citizens.
The proposal also claims that the immense amount of electricity required to operate mining operations causes uncertainty for municipal power facilities. When weather conditions become severe, residential areas become a higher priority for energy consumption, and mining operations could jeopardize that situation.
Will web3 be impacted?
Clearly, this proposal would have a significant impact on the various cryptocurrency mining operations that exist in the United States. In fact, some states like New York have already passed laws related to mining operations. However, despite the obvious effects that this proposal will have on bitcoin, web3 might not be in any harm.
As many know already, Ethereum successfully merged into a proof-of-stake network last year. This caused all mining operations related to Ethereum to end as they were no longer needed, using validators for consensus instead.
With the majority of the web3 industry being built on the Ethereum network, it shouldn’t bother most developers or investors who interact with layer 2 networks more so than the Bitcoin network. In fact, the bitcoin blockchain is highly criticized for its lack of utilities as there is not much else to do on the network besides transferring bitcoin, unlike Ethereum which employs smart contracts that allow for various different protocols to be developed.
Moreover, besides Bitcoin, there are not many other significant proof-of-work networks that require large mining operations. While Dogecoin has caused some excitement in the past, it severely lacks any of the financial freedoms created by Bitcoin or the utilities on Ethereum.
