What Kazakhstan's new tax system means for the crypto mining industry

The new amendments recently signed by the country's president could strengthen the modification of the energy grid while keeping overall prices relatively modest.

On July 11, Kassym-Jomart Tokayev, president of Kazakhstan, signed a new tax rate for crypto mining operators. While the amendments reflect the country's growing frustration with the underburdened and opaque use of the national grid by foreign investors and domestic perpetrators, the new tax is difficult to call an exclusion tax.

In addition, they could herald the further adoption and legalization of the mining industry in energy-rich Kazakhstan, making the country and the region a more attractive destination for miners in more mature jurisdictions where pressure is tightening.

Reality check

The two amendments will take effect on January 1, 2023, and will tie the tax rate to electricity bills paid by mining operators. On a progressive scale, operators will have to pay a tax of $0.024 or KZ10 for one kilowatt-hour (kWh) of energy, with a minimum price of $0.012-0.024 and a maximum of $0.0072, or kZT 3, up to a maximum of $0.048-0.060 per kWh. Those who use the renewable energy they produce will face the most favorable conditions of only one tenge per kWh.

These recent amendments are not the first time the Kazakh government has tried to tax the industry. Tokayev signed a previous bill on June 29, 2021, and proposed an additional payment of $0.0023, namely 1 tenge, at that time for 1 kWh of electricity consumed for mining.

The tax amendment became a milestone in Kazakhstan's long and difficult relationship with crypto mining mania, which has attracted a wave of foreign mining operators to the country. It is estimated that by November 2021, more than 87,849 mining machines have been shipped to the Republic. Kazakhstan's stars on the global mining map exploded quickly after China cracked down on crypto mining across the country. By 2021, the country is the second largest bitcoin (BTC) miner in the world – only behind the United States – accounting for 18.1% of the global bitcoin mining hash rate.

Chinese miners have been moving their operations to Kazakhstan, seeing Kazakhstan as a "mining paradise" because of the stable political environment and cheap electricity. For its part, the Kazakh government has welcomed a wave of new investors by supporting crypto mining up to direct subsidies – experts expect mining tax revenues to exceed $1.5 billion over the next five years.

Digital mining was recognized as a legitimate commercial activity in early 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 foundation for crypto regulation.

However, this fairy tale met reality in early 2022, when it turned out that neither the X-factors of mining – political stability and energy abundance – were far from guaranteed. By the end of 2021, it became clear that the country's energy system would not be able to accommodate all miners, and in January 2022, a nationwide protest over fuel prices led to a brief political collapse and the Russian military stepped in to defend the status quo.

Coincidentally, after the political turmoil of the winter, the Kazakh authorities reconsidered their stance on crypto mining and began trying to control the fast-growing industry. On February 8, Tokayev ordered a cabinet-level investigation into cryptocurrency mining, and Marat Sultangaziyev, first deputy minister of the Ministry of Finance of Kazakhstan, proposed to raise the price of electricity for crypto miners. Since then, the government has begun to report regularly on the closure of illegal miners, with the largest case occurring in March, when 55 illegal mining sites "voluntarily ceased operations" due to enforcement activities by regulators and 51 entities "terminated" their operations.

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In May, the country's digital development minister set new reporting requirements for miners and passed the now-signed tax guidelines on first reading to domesticate the industry and avoid further power shortages. Authorities have even publicly acknowledged the impact of the winter raids on their revenues, with revenues of $1.5 million in the first quarter of 2022, a figure that almost matches the ambitious forecasts mentioned above.

Considerations and benefits

In an interview with Cointelegraph, the founder and CEO of crypto mining company Sazmining William Szamosszegi took an unapologetically opposed position against the efforts of the Kazakh authorities to regulate the mining industry. While the environmental problems caused by energy consumption are certainly a problem, he argues that these regulations may not be the most effective solution, as they will not promote innovation, but will actually raise the cost of living for ordinary people. Rising food and energy prices translated into "on-the-ground" populations, these policies could complicate things even more:

"After doubling the price of natural gas in early 2022, protests broke out in Kazakhstan. This price increase is no accident: over the past few years, the government has increasingly intervened in the country's energy sector, often to support renewable energy projects. But there's no such thing as a free lunch, so their support for renewables comes at the expense of coal, crude and natural gas producers.

Szamosszegi pointed to another official policy that is not directly related to crypto regulation, namely the "Energy Conservation and Energy Efficiency" law passed in January 2022. This legislation sets out a number of criteria for both energy consumers and producers, for example, all entities that consume energy resources of 1,500 tons or more of standard fuel per year are obliged to register in the National Energy Registry. In his view, this slows the growth of the energy sector, which in turn makes the sector vulnerable to rising prices.

Aleksandr Podobnykh, a blockchain cybersecurity and fraud expert and a member of the Regional Association of Chief Information Security Officers (ACISO), has different ideas. He told Cointelegraph that while the new taxes will be hardly welcomed by miners, they will help Kazakhstan keep its energy sector sustainable:

"This, of course, exacerbates the work of miners. But it is good for the country. Production lines and equipment will be updated – we need to use cheaper and renewable energy.

While approving the new tax amendments, Podobnykh highlighted a weakness that had already happened in previous legislative work and had not disappeared with the latest updates. In particular, the new amendment does not change the existing legislation on the tax liability of individuals who derive income from property through the sale of digital unsecured assets. Therefore, the taxable income will be calculated as the full sales price of the asset, without deducting the cost of acquisition.

There is also controversy over the leasing of mining services. Under current tax guidelines, crypto mining rents will be taxed as income from leased properties. According to these guidelines, the common practice of selling hash rates, where customers rent a certain amount of computing power from crypto miners, still has no specific regulatory regime. As Podobnykh explains:

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"This will focus on large miners to a greater extent." Cloud miners will also be indirectly affected, as this will have a proportional impact on the cost of services. Of course, it is not suitable for those who rent facilities in other jurisdictions.

Still, even with the above warnings, the overall mix of Tax and Energy Prices in Kazakhstan remains relatively attractive – even under the highest mark, 1 kWh would cost miners about $0.067, which is significantly lower than the average of $0.12 per kWh before any U.S. taxation the Post-Soviet Republic may remain the clearest jurisdiction for miners in the region, with Podobunikh arguing that the new tax regime will put Kazakhstan's neighbors to a severe test:

"This is definitely a positive signal for the entire industry in Kazakhstan. In a way, it is a test area for the former CIS countries and Russia.