The United Arab Emirates Extends VAT Exemptions to Digital Assets, the IMF Calls for Higher Taxes for BTC Miners

The United Arab Emirates has exempted digital asset holders from paying value-added tax (VAT) on their transactions, extending the same exemptions enjoyed by traditional financial services to the nascent sector.

The United Arab Emirates (UAE) has extended value-added tax (VAT) exemptions to digital asset holders, aligning the nascent sector with traditional financial services. Meanwhile, the International Monetary Fund (IMF) has proposed higher taxes for bitcoin miners to reduce their carbon footprint.

UAE extends VAT exemptions to digital assets

The Federal Tax Authority (FTA) of the UAE has amended VAT regulations to exempt the transfer and conversion of digital assets, effective November 15, according to a recent update. The amendments were approved by the Cabinet earlier this year and cover other digital asset-related services, such as managing investment funds focused on digital tokens.

However, the exemptions do not apply to financial securities or the digital representation of fiat currencies. The tax exemptions will be retroactively applied from January 2018, allowing virtual asset service providers (VASPs) in the UAE to claim input tax recovery for the VAT paid during those six years.

According to Ankita Dhawan of Metis Institute, a boutique advisory, the VAT exemption essentially places digital assets in the same category as traditional financial services, several of which are already exempt from the tax. This move legitimizes virtual assets and aligns with the European Union (EU), which scrapped VAT for digital asset transactions almost a decade ago.

In 2015, the Court of Justice of the European Union ruled that the exchange of a digital asset for fiat is exempt from VAT in a case referred by a Swedish court. However, some services, like mining and wallets, could be subject to taxes based on the individual country's laws.

The United Kingdom followed the EU's lead and exempted digital asset exchanges from VAT, classifying them as a supply of a financial service. Australia and Singapore also exempt the exchange of digital assets for fiat from the Goods and Services Tax (GST).

Other jurisdictions that exempt digital asset exchange from GST, VAT, or consumption tax include Canada, Switzerland, and Japan.

IMF calls for higher taxes on bitcoin miners to reduce carbon footprint

In contrast to the UAE's move to reduce the tax burden on the digital asset sector, the IMF is calling for higher taxes for bitcoin miners and artificial intelligence (AI) data centers due to their rapidly increasing energy consumption and carbon footprint.

In a blog post, IMF executives Shafik Hebous and Nate Vernon-Lin criticized digital assets and AI for being "power-hungry." They claimed that one bitcoin transaction consumes the same energy as an average Pakistani does in three years, while a ChatGPT query uses 10 times more energy than a Google (NASDAQ:GOOGL) search.

According to the IMF's research, digital asset miners could generate 0.7% of all carbon dioxide emissions by 2027, while data centers could hit 1.2% of the global total or 450 million tons.

The organization suggests a direct tax of $0.047 per kilowatt hour for bitcoin miners, which it believes would bring them up to global standards. Considering other factors, like the impact of air pollution on the health of the surrounding communities, this tax should hit $0.089. This would result in an 85% increase in the average price of electricity for miners.

On the other hand, it would generate $5.2 billion in global revenue and a reduction in annual emissions by 100 million tons.

With electricity accounting for up to 80% of the miners' total costs, this would significantly impact a sector that has already been struggling, with most public miners recording losses in the first half of the year.

The IMF acknowledges that the situation is the opposite in many jurisdictions, where miners enjoy generous tax exemptions and other financial incentives.

In Texas, for example, the Electric Reliability Council of Texas (ERCOT) has faced backlash from residents and legislators for cutting deals with bitcoin miners to compensate them for reducing their energy consumption during peak demand periods. In one instance, ERCOT paid Riot Blockchain (NASDAQ:RIOT) over $31 million not to mine.

Beyond taxes, the IMF also advocates for "credits for zero-emission, bilateral power purchase agreements, and potentially renewable energy certificates."

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