What taxes are involved in mining in Nigeria? Nigerian Crypto Tax Study

By 2023, Nigeria was the second largest country in the world in terms of Bitcoin usage, with 22 million cryptocurrency holders, representing 10% of the population. Nigeria ranked 11th in Chainalysis’ 2022 Global Cryptocurrency Adoption Index and 17th in P2P exchange trading volume.

In June 2021, the Nigerian government announced a ban on cryptocurrency mining, citing that cryptocurrency mining consumes a large amount of energy resources, while Nigeria’s power supply is still tight. Additionally, the government was concerned that cryptocurrency mining could affect the stability of the domestic currency. However, the Nigerian government’s attitude towards cryptocurrency has recently become more lenient, as it lifted the ban on cryptocurrency transactions in December 2023, which will also benefit cryptocurrency mining.

1. Cryptocurrency mining

1.1 Conditions for cryptocurrency mining

Early Bitcoin mining could be completed using regular personal computers, but as mining difficulty increased, specialized mining hardware ASIC (Application-Specific Integrated Circuit) became the mainstream choice for mining. ASIC devices are specifically designed for Bitcoin mining and are many times more efficient in mining operations than general-purpose hardware. At the same time, efficient mining operations generate a lot of heat, so an effective cooling system is crucial for maintaining the stable operation of mining hardware. In some large mining data centers, in addition to traditional air conditioning cooling, liquid cooling and other efficient heat dissipation technologies are also adopted.

Bitcoin mining is an energy-intensive process. The continuous operation of mining equipment for 24 hours consumes a large amount of electricity, and the cost of electricity becomes one of the key factors affecting the profitability of mining. Mining in areas with low electricity prices can significantly reduce costs and improve mining profits.

1.2. Nigeria’s Advantages in Cryptocurrency Mining

1.2.1. Abundant Natural Resources and Power Resources

Nigeria has a large gas reserve, which is the main fuel for thermal power generation. The country’s gas reserves rank among the world’s top. The abundant fuel resources make thermal power generation a reliable and readily available option for meeting the country’s growing power demand. Nigeria already has a well-developed thermal power infrastructure, including power plants, pipelines, and gas supply networks. This infrastructure has laid the foundation for the continued dominance of thermal power generation. It can achieve efficient fuel supply, transmission, and distribution, making the operation and expansion of thermal power plants cost-effective.

At the same time, the country has abundant renewable energy sources, including solar, wind, biomass, and small hydroelectric power (SHP). The widespread adoption of renewable energy will expand Nigeria’s power generation capacity, and the power market can increase its overall capacity to meet the growing power demand.

1.2.2 Relatively Low Electricity Prices

Bitcoin mining requires a significant amount of electricity, and electricity accounts for up to 80% of miners’ operating costs, so obtaining cheap electricity is a key competitive advantage in mining. Nigeria’s electricity prices are relatively lower compared to other countries, as shown in the chart of electricity prices in some countries in September 2023.

1.2.3 Favorable Climate

The climate conditions in Nigeria are also very favorable. The ideal temperature for mining is 5 to 25 degrees Celsius, which happens to match Nigeria’s average temperature. This is beneficial for the stable operation and cooling of mining hardware systems.

1.2.4 Government Position Shift

The Nigerian Central Bank (CBN) has recently undergone a significant shift in its stance on cryptocurrencies, moving from an outright ban to introducing a structured regulatory framework for virtual asset service providers. This development is aimed at keeping pace with the global blockchain and digital asset trend. The CBN has set strict rules for financial institutions handling cryptocurrencies, marking the beginning of a new era in Nigeria’s digital finance and signifying a major shift in its financial regulatory environment. As the country continues to explore this new domain, the CBN is seeking to responsibly integrate cryptocurrencies into its financial system, which is also beneficial to the development of local cryptocurrency mining.

1.2.5 Cryptocurrency Mining May Alleviate Local Problems

Although Nigeria has the largest GDP in Africa, it has a serious inflation problem, and the country’s foreign exchange controls limit the ability to exchange foreign currencies to fight inflation, so residents want to be able to circumvent currency regulations and avoid asset shrinkage. The decentralized and global nature of cryptocurrencies is very much in line with the needs of local people, which also promotes the development of mining activities and cryptocurrency transactions in the local area.

2. Taxation issues of cryptocurrency mining

The tax treatment of crypto-asset mining business mainly depends on the definition of crypto-assets, the classification of assets, and the recognition and measurement of mining income and expenses in the country or region. Mining income varies from country to country, and the main types of taxes involved are also different.

Firstly, there are direct taxes, namely income tax and capital gains tax on mining income. In most countries where mining businesses are involved, mining income is treated as business income for corporations or individuals and subject to corporate income tax or personal income tax. The income tax rate is determined by the identity of the miner (individual or corporation), income level, and place of residence, among other factors.

Secondly, there are indirect taxes, namely value-added tax (VAT) or goods and services tax (GST) on mining income. There is no consensus among countries or regions on whether to impose VAT or GST on mining income. In the European Union, most countries believe that mining activities are not subject to VAT. In Israel, however, mining activities are considered to be providing services and subject to 17% VAT according to the document on taxing virtual currency activities issued in 2017. In New Zealand, mining activities are also considered to be services and subject to 15% GST.

Finally, some countries impose consumption tax on mining enterprises for reasons such as industry resource adjustment. For example, in the United States, the “Supplemental Budget Reconciliation Document” issued by the US Treasury Department in March 2023 suggested imposing consumption taxes in stages based on the cost of electricity used in cryptocurrency mining. Companies engaged in mining activities were required to report their electricity consumption and the type of electricity used.

3. Nigeria’s Tax System

3.1 Overview of Tax System

Nigeria’s tax system is based on direct taxes and indirect taxes. The main direct taxes are: corporate income tax, personal income tax, capital gains tax, petroleum profit tax, and various miscellaneous taxes; the main indirect taxes are: value-added tax, import duties, consumption tax (goods tax), and stamp duty.

Nigeria has a fairly complete tax law system and a fairly systematic tax administration system, which is Nigerian companies are required to pay corporate income tax on their profits from global operations, while non-Nigerian companies pay a certain percentage of their income from certain activities in Nigeria, collected by the federal government. The rate of corporate income tax for Nigerian resident companies is 30%, payable annually. Non-resident companies are required to pay a special tax of 15% on their annual turnover if they conduct business in Nigeria and generate more than 60 million naira in revenue. If their annual turnover in Nigeria is less than 60 million naira, they are required to pay a special tax of 1.5 million naira, or 15% of 60 million naira.

3.2.2 Value Added Tax (VAT)

Value Added Tax is levied in Nigeria on sales of goods or provision of independent services, as well as on imports of goods or services. Prior to February 1, 2020, Nigeria levied a 5% Value Added Tax on the face value of invoices for existing taxable goods or services, including imported goods. Effective February 1, 2020, the standard VAT rate for all taxable goods and services was raised from 5% to 7.5%.

3.2.3 Tariffs

Import tariffs are non-preferential and apply equally to all countries. Special tariffs or ad valorem tariffs may be imposed on goods based on their nature, with the legal tender currency being the naira for payment of duties. Goods that the government believes are being dumped or receiving non-normal subsidies, and thus pose a threat to existing or potential domestic industries, may be subject to special tariffs.

3.2.4 Capital Gains Tax

Under Nigerian tax law, individuals who dispose of shares worth N100 million or more within a continuous 12-month period are required to pay a 10% capital gains tax, unless the proceeds are reinvested in the shares of any Nigerian company.

4. Tax Analysis of Cryptocurrency Mining Enterprises in Nigeria

After India, Nigeria has become the world’s second largest user of cryptocurrencies. The central bank of Nigeria has rescinded the relevant ban set in 2021, allowing financial institutions to engage in transactions with companies providing digital currency services. Although Nigeria’s related regulations remain strict, this is still an unprecedented opportunity for the cryptocurrency industry, attracting many cryptocurrency mining enterprises to settle in Nigeria, while inevitably involving some tax issues.

Nigeria adopts a combination of territorial and resident taxation principles, where any enterprise that obtains income within Nigeria is required to pay corporate income tax. Nigerian resident enterprises should declare and pay corporate income tax on their global income, while non-resident enterprises pay corporate income tax on certain income at a certain percentage rate, and cryptocurrency mining enterprises that operate in Nigeria pay corporate income tax on their income obtained within Nigeria according to relevant tax regulations.

Supplies of electricity and other services are subject to Value Added Tax (VAT) as they are considered to be the provision of goods and services. At the same time, cryptocurrency mining companies are extremely dependent on electricity, so cryptocurrency mining companies may indirectly be subject to VAT, which indirectly affects electricity companies.

Cryptocurrency mining companies operate their businesses with hardware equipment such as mining machines, and since there is a lack of mining equipment in Nigeria, there may also be issues related to the import of specialized equipment such as mining machines, which would involve customs duties. Virtual currency mining machines are generally considered to be manufacturing machinery, and Nigeria has specific regulations on the import of mechanical equipment: the import duty for mechanical and mechanical equipment is generally 5%-15%, but the import duty for some machinery is zero, such as agricultural machinery equipment.

A new legislation stipulates that Nigeria will impose a 10% capital gains tax on cryptocurrencies. Nigeria’s former President Muhammadu Buhari signed the 2023 Fiscal Law, making it a law. The bill introduced a series of tax reforms aimed at modernizing the country’s fiscal framework. It includes provisions for taxing income from the disposal of digital assets, including cryptocurrencies, at a rate of 10%. This comprehensive legislation aims to increase government openness, increase tax revenue, and stimulate the economy, and taxing the rapidly appreciating value of cryptocurrencies has become a necessary measure in the legislation. By taking this action, the Nigerian government not only hopes to provide a fair competitive environment for those who own digital assets, but also wants them to pay a fair share of taxes for the country’s growth. This part of the tax will also affect mining companies.

As for the point of recognizing the income from mining, many views hold that cryptocurrency mining represents the intangible assets developed by the mining enterprises, and the computer, electricity, and various employee costs used for construction and mining form the intangible assets developed by the enterprises internally, so the income or gain should be recognized when the cryptocurrency is sold later. However, the Nigerian government has no clear regulations on this.

Finally, there is no clear regulation indicating that Nigeria currently has tax incentives for mining enterprises, but mining enterprises may be eligible for some existing tax incentive policies, so mining enterprises should arrange their tax planning work reasonably within the framework of general tax incentive policies.

Reference:

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[5]. Cryptopolitan. (2024). Nigeria Changes its Stance on Cryptocurrency with New Regulatory Framework