This is one article in a collection of 52 articles published weekly throughout 2023 on the basics of Bitcoin. The series is intended for people unfamiliar with Bitcoin or people wishing to enhance their understanding of the fundamentals that underpin the technology. Please contact us, if you have any questions or comments.
The White House recently released the President’s vision for the 2024 Budget. The lengthy document includes a new proposed tax on proof of work mining systems. The proposed tax, called the Digital Asset Mining Energy (DAME) excise tax, calls for a 30 percent tax on the electricity used to mine cryptocurrencies. This tax is clearly directed at Bitcoin which is far and away the predominate cryptocurrency that uses a proof of work (PoW) system.
What is puzzling about the tax is understanding the motive. There are only two real possible motivations. First, the government may naively believe implementing the tax could be a way to create additional revenue for the government. Alternatively, the White House may understand Bitcoin mining and the DAME excise tax is just a front to end all Bitcoin mining operations in the United States. Regardless of which answer is correct, the projections of the tax don’t make sense given the Bitcoin mining can occur anywhere on earth.
The creators of the DAME excise tax and the projectors of the 2024 White House budget clearly do not understand the ease at which Bitcoin miners can move their operations. The only two things that are needed for Bitcoin mining are an electricity source and a dependable internet connection. Additionally, the equipment necessary for Bitcoin miners to operate can be transported easily. As a result, Bitcoin mining can theoretically occur anywhere on earth.
The White House release “promoting” the DAME excise tax pointed out that China along with eight other countries (which the release mysteriously does not mention likely because of who those countries are – Algeria, Bangladesh, Egypt, Iraq, Morocco, Nepal, Qatar, and Tunisia) banned Bitcoin mining completely. However, what the release did not mention is the China ban on Bitcoin mining in May 2021 only temporarily decreased the overall hash rate. However, once the miners were able to move their equipment out of China and find new energy sources the hash rate quickly recovered and today the hash rate is almost twice as high as it was in May 2021.
The DAME excise tax will not have an impact on the amount of Bitcoin mining that is occurring. Rather the DAME excise tax would only impact where the mining is occurring. Furthermore, while the nine countries cited by the White House have banned Bitcoin mining, even more are embracing the technology in hopes to better position their country for the future. If the United States were to tax electricity used for Bitcoin mining (ironically even electricity from renewable projects), the Bitcoin mining industry would have plenty of countries fighting to serve as their new home.
What is ignorant is the budget’s projection on how much the DAME excise tax would generate over the next ten years (see page 156 of the budget). The projections begin in 2024 with the DAME tax producing 74 million in revenue. In 2025199 million is collected followed by 327 million in 2026. Beginning in 2027 the budget projects for the tax to produce385 million in revenue and grow at approximately 10 million per year until 2033.
The early years of growth are presumably because the tax is going to grow until the DAME excise tax matures into the full 30 percent tax. However, the projections fail to take into account that the Bitcoin miners may all leave to flock to cheaper sources of energy. Again, as stated above, Bitcoin mining can occur anywhere in the world there is a reliable internet connection. Therefore, the primary driver of where Bitcoin mining occurs is the price of energy. Unless the United States is creating electricity significantly cheaper (42.86 percent cheaper to be exact) than the rest of the world, the only realistic projections for the DAME excise tax would be0, particularly in the later years.
Fortunately, a new tax such as the DAME excise tax would be required to pass both the House and Senate. We would speculate this is a long shot given the current arrangement of both chambers. While the Biden administration has taken a hostile position towards Bitcoin, there is still time for the administration to promote the myriad benefits that Bitcoin can bring to the people of the United States that are aligned with the administration's goals such as high paying jobs and more ESG friendly renewable projects.
