Italian Tax authorities rule on VAT and income taxes on mining activity

With the reply to ruling No. 5078 of 12 October 2022, the Italian tax authorities issued important indications as to whether digital currency mining activity should be subject to VAT and direct taxation.

Such mining activity consists in the "mining" of cryptocurrencies, materializing in a validation process aimed at the creation of virtual coins. The process is based on so-called proof-of-work, consisting of the resolution of a complex system of operations in the relevant blockchain using computing power (through the use of hardware and software) provided by a miner.

In the absence of specific tax regulations about mining at both the domestic and EU level, the tax revenue agency clarified that the following general principles must be applied. 

VAT

From a VAT standpoint, the OECD in "Taxing Virtual Currencies: An Overview of Tax Treatments and Emerging Tax Policy Issues" dated October 12, 2020, " shows consistent behavior among states since almost all of them treat transactions related to cryptocurrencies as exempt or excluded from the scope of VAT.

In the light of these considerations and those - on the same subject - developed by the tax administrations of some states, such as France, Germany and the United Kingdom, "mining" seems to be able to be defined as an activity that secures - by recording them and sharing the results with the network - transactions within the so-called "blockchain" technology on which the creation of crypto-assets, including cryptocurrencies, is based.

Miners are generally rewarded-directly or through the pool to which they adhere-by the self-managing system/network/network, through the allocation of cryptocurrencies, and only when they first obtain the validation of a block, the latter eventuality not always occurring. In other words, the performance of the validation activity is not sufficient to entitle the miner to a fee: this fee accrues to him only if said activity "first" succeeds.

In the light of the above, as the miner is rewarded automatically by the system/network, it has been considered that the remuneration paid by the network is not part of an exchange of services relationship. In fact, this is a distributed technology, connoted by the absence of a party that can be considered as a principal of service provision.

The absence of a service directly provided by the miner in favor of a buyer, determined or determinable, allows the mining to be considered irrelevant for VAT purposes. It follows that the VAT paid on purchases cannot be deducted. The taxpayer is consequently not bound by the documentary, reporting and payment obligations under the VAT rules on such operations.

Direct Taxes

As the above-mentioned services are remunerated by virtual currencies, the principle expressed in the answer no. Ruling 788/E of 2021 is applicable. This means that the general rules governing transactions in traditional (foreign) currencies apply to transactions in virtual currency (Articles 9 and 110 TUIR). 

Notably, regardless of the possibility of identifying the person who provides the consideration for the services provided, the related remuneration is taxable income, in the tax period in which the services can be considered completed, pursuant to paragraph 2 of Article 109 of the TUIR. If the activity of the "miner" is not remunerated, because the "block" was resolved by a different actor, a loss on receivables is realized and the deductibility is allowed under Article 101, paragraph 5 of the TUIR.

Lastly, for IRAP purposes, the remunerations of the "miner" must be included in the value of net production as revenues for services related to the main activity of the taxpayer. Fluctuations in value, on the other hand, would not be included in the taxable base of the regional tax, only to the extent that they do not transit from items relevant for IRAP purposes.

If you wish to discuss this topic, please contact: WTS R&A Studio Tributario, Milan

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