Digital Asset Mining Tax Would Set Poor Precedent

The Inflation Reduction Act of 2022 distorted energy markets with a host of tax hikes and tax credits, but the Biden administration would take things even further with its proposal to tax energy use from crypto mining.  As the Competitive Enterprise Institute (CEI) highlights in their recent report on the topic, in Biden’s 2023 budget proposal, he proposed a new tax called the Digital Asset Mining Energy (DAME) tax that would add a further 30 percent in costs to energy used to run blockchain networks. This proposal is both misguided and a dangerous precedent, as it fundamentally misconstrues cryptocurrency’s structure, would drive away innovation, and as CEI notes, could encourage other ideological taxes.

Cryptocurrency is based on a networked system of nodes that use cryptographic techniques to securely transmit information and update a shared ledger of transactions, oftentimes using rewards in the form of the blockchain’s native currency to incentivize “mining.” Mining is actually the process of the nodes, or individual computers, facilitating the transactions by maintaining the unchangeable record according to the individual blockchain’s protocols or “language.” Some blockchains, like the ubiquitous bitcoin, operate based on a Proof of Work (PoW) methodology, which requires nodes to compete to solve complex calculations to find the correct “hash” or combination that fits the protocol. This process ensures the validity of the system through incentivization of accurate reporting of new transactions into the blockchain, and makes it extremely difficult, if not impossible, to undo. The other leading alternative to this, Proof of Stake (PoS), is used in Ethereum, the second largest blockchain. PoS requires nodes to ante up a certain amount of the cryptocurrency to the network to be held “in deposit” which is then penalized if the transaction is determined to be false or incorrect. A larger stake allows for a better chance to be the “winner” of the transaction and be rewarded for participating. Both of these major systems can be energy intensive because of the computational power required to maintain a large decentralized system. However, this power requirement versus the potential reward incentivizes miners to seek out low energy cost localities that have trended towards being powered by renewable energy.

The DAME tax fundamentally misses the point that cryptocurrency and blockchain technology overall is still a growing industry and has resulted in substantial gains for individuals that invest in it and companies that integrate this technology. Blockchain miners are not net negatives on a given system that generate money from thin air, but instead are the backbone of the entire system. Consumers or companies can use cryptocurrencies as an alternative asset class or build systems based on blockchain technology that will be better secured against fraud and decentralized against interference. The major promise of this technology is that it can enable faster and more autonomous transactions or actions to take place on a network. Miners are a key to making this happen, but are also significantly price sensitive to energy costs and would probably shift to other localities if a federal crypto mining tax were implemented. Some argue that crypto mining generates higher energy costs, but in reality, these systems often migrate to lower population areas and can incentivize development of power capacity. Even further, this power capacity can be helpful to communities, as in times of high-load, the cryptocurrency operations can be shut down due to higher power costs, while homes can maintain power. On a global basis, the United States can ill afford to lose its technological edge against China or other localities like El Salvador or Singapore in seeking to become the world leader in cryptocurrency. At a current valuation (as of writing) around $1.5T in the overall cryptocurrency market, and a projected value ranging from hundreds of billions to even $3.1T in 2030, there is a major incentive for the U.S. to not cede yet another strategic industry to competitors abroad.

By attempting to implement this misguided tax, the Biden Administration could bring to bear a host of new taxes to hamper innovators of all kinds, not just in crypto. Therefore, instead of pushing crypto out of the U.S. lawmakers and administrative officials should instead seek to create a stable regulatory framework on crypto as NTU has proposed in the past, and also reduce barriers to energy generation through permitting process reform to reduce energy costs for all Americans.