What Kazakhstan’s new tax regime means for the crypto mining industry

New amendments recently signed by the country’s president could bolster the energy grid refit while keeping overall prices relatively moderate.

On July 11, the President of Kazakhstan, Kassym-Jomart Tokayev, signed new tax rates for crypto mining operators into law. While these amendments reflect the country’s growing frustration with the undertaxed and non-transparent usage of the national power grid by both foreign investors and domestic perpetrators, the new taxes could hardly be called excluding.

Moreover, they could signal the further adoption and legalization of mining in energy-rich Kazakhstan, making the country and the region an even more attractive destination for miners amid tightening pressure in more established jurisdictions.

Reality check

The two amendments will come into effect on Jan. 1, 2023, and will tie tax rates to the price mining operators pay for the electricity. Following a progressive scale, an operator will have to pay $0.024, or 10 tenges, of taxes for a kilowatt-hour (kWh) of energy at the lowest price of $0.012–0.024, and $0.0072, or 3 tenges, at the highest of $0.048–0.060 per Kwh. Those who use renewable energy that they produce will face the most favorable conditions of only one tenge per kWh.

These recent amendments are not the Kazakh government’s first attempt to tax the industry. A previous bill was signed by Tokaev on June 29, 2021, and introduced an additional payment of $0.0023, or 1 tenge, at the time for 1 kWh of electricity consumed for mining.

The tax amendments became a landmark in the long and difficult history of Kazakhstan’s relationship with the crypto mining frenzy, which drew a wave of foreign mining operators to the country. By some estimates, more than 87,849 mining machines have been brought to the republic by November 2021. Kazakhstan’s star on the global mining map sparked swiftly after the nationwide crackdown on crypto mining in China. By 2021, the country became second in global Bitcoin (BTC) mining — trailing only behind the United States — and accounted for 18.1% of the global Bitcoin mining hash rate.

Chinese miners have been relocating their business to Kazakhstan, believing it to be “a paradise of the mining industry” because of the stable political environment and cheap electricity. The Kazakh government, for its part, has welcomed the wave of new investors by supporting crypto mining up to the point of direct subsidies — experts have been anticipating more than $1.5 billion of tax revenue from mining within the next five years.

Digital mining was recognized as a legitimate business activity earlier in 2020 when the law “On Amendments and Additions to Some Legislative Acts of the Republic of Kazakhstan on the regulation of digital technologies” laid the foundations for crypto regulation.

However, the fairytale met reality in early 2022 when it turned out that both x-factors for mining — political stability and energy abundance — were far from guaranteed. By the end of 2021, it became clear that the country’s energy system didn’t have the capacity to accommodate all miners, and in January 2022, the nationwide protests over fuel prices led to a brief political collapse, with Russian troops stepping in to defend the status quo.

Coincidentally, after the winter political tumult, Kazakh authorities reconsidered their stance toward crypto mining and began attempts to take the wildly growing industry under control. On Feb. 8, Tokayev ordered a cabinet-level investigation of cryptocurrency mining, with Kazakh First Vice Minister of Finance Marat Sultangaziyev proposing power price hikes for crypto miners. Since then, the government began to periodically report the shutdowns of illicit miners, with the largest case taking place in March when 55 illegal mining farms “voluntarily stopped their operation” due to an enforcement campaign by regulators, with another 51 entities’ operations “terminated.”

In May, the country’s Minister of Digital Development laid out new reporting requirements for miners and passed the now-signed tax guidelines in the first reading to domesticate the industry and avoid further problems with power shortages. The authorities even publicly acknowledged the influence of the winter raids on its revenue, which composed a modest $1.5 million in Q1 2022 — a number that hardly matches the ambitious forecasts mentioned above.

Caveats and benefits

Speaking to Cointelegraph, founder and CEO of crypto mining firm Sazmining William Szamosszegi took an unapologetically oppositional stance toward Kazakh authorities’ efforts to regulate the mining industry. Although environmental issues caused by energy consumption are certainly a concern, he believes that the regulations may not be the most effective solution because they do not boost innovation and instead raise the cost of living for everyday people. Translating into higher food and energy prices for the population “on the ground,” such policies could complicate things even more:

“Protests erupted in Kazakhstan after gas prices doubled at the very beginning of 2022. This price hike is no accident: The government has increasingly intervened in the country’s energy sector over the last several years, often to support renewable projects. But, there is no such thing as a free lunch, so their support for renewables comes at the cost of coal, crude oil and natural gas producer.”

Szamosszegi noted another official policy not directly tied to crypto regulation, the “Energy Conservation and Energy Efficiency” law passed in January 2022. This legislation forced a number of criteria on both energy consumers and producers, for example, an obligation to register with the State Energy Registry for all the entities that consume energy resources amounting to 1,500 or more tons of standard fuel per year. In his opinion, that slows down the growth of the energy sector, which in turn leaves the sector vulnerable to price increases.

Aleksandr Podobnykh, a blockchain cybersecurity and fraud expert and member of the regional Association of Chief Information Security Officers (ACISO), is of a different mind. He told Cointelegraph that, although the new taxes could hardly be welcomed by miners, they will help Kazakhstan to maintain the sustainability of its energy sector:

“This of course aggravates the work of miners. But good for the state. The lines and equipment will be updated — we need to use more cheap and renewable energy.”

While endorsing the new tax amendments, Podobnykh highlighted a weak spot, which occurred already in previous legislation efforts and didn’t go away with the latest update. In particular, the new amendments have not changed the existing legislation regarding the tax obligations of individuals who have received property income from the sale of digital unsecured assets. Hence, taxable income will be calculated as the entire sale price of such an asset without deducting the cost of acquisition.

There is also controversy regarding the rental of mining services. Under current tax guidelines, crypto mining rentals will be taxed as income from renting property. Under these guidelines, the widespread practice of selling hash rate, where the customer rents a certain amount of computing power from a crypto miner, remains without a specific regulatory regime. As Podobnykh explained:

“It will concern large miners to a greater extent. Cloud miners will also be indirectly affected because this will affect the cost of services proportionally. Of course, not for those who rent facilities in other jurisdictions.”

Still, even with the aforementioned caveats, the overall combination of taxes and energy prices in Kazakhstan remains relatively attractive — even at the highest mark, 1 kWh would cost miners around $0.067, which is significantly lower than the average of $0.12 per kWh before any taxes in the United States The post-Soviet republic remains perhaps the clearest jurisdiction for miners in the region, and the new tax regime will serve as an acid test for Kazakhstan’s neighbors, Podobnykh believes:

“This is definitely a positive signal for the industry as a whole in Kazakhstan. To some extent, it acts as a pilot zone for the countries of the former CIS and Russia.”