Author | TaxDAO-Ray
As of 2023, Nigeria is the world’s second-largest Bitcoin user, with 22 million cryptocurrency holders, or 10% of the total population. Nigeria ranks 11th in Chainalysis’ 2022 Global Cryptocurrency Usage Index and 17th in P2P exchange trading volume.
In June 2021, the Nigerian government announced a ban on cryptocurrency mining, arguing that cryptocurrency mining consumes a lot of electricity resources, while Nigeria's electricity supply is still tight. In addition, the government is worried that cryptocurrency mining may affect the stability of the domestic currency. However, the Nigerian government's attitude towards cryptocurrencies has recently loosened. It lifted the ban on crypto transactions in December 2023, which will also be conducive to the development of cryptocurrency mining.
1. Cryptocurrency mining
1.1 Conditions for cryptocurrency mining
In the early days, Bitcoin mining could be done using ordinary personal computers, but as the difficulty of mining increased, professional mining hardware ASIC (Application-Specific Integrated Circuit) became the mainstream choice for mining. ASIC equipment is designed specifically for Bitcoin mining and is many times more efficient than general-purpose hardware in mining. At the same time, efficient mining operations generate a lot of heat, so an effective cooling system is crucial to maintaining the stable operation of mining hardware. In some large mining computer rooms, in addition to traditional air-conditioning cooling, efficient heat dissipation technologies such as liquid cooling are also used.
Bitcoin mining is an energy-intensive process. Mining equipment running 24 hours a day consumes a lot of electricity, and electricity costs become one of the key factors in mining profits. Mining in areas with lower electricity prices can significantly reduce costs and increase mining profits.
1.2 Advantages of Cryptocurrency Mining in Nigeria
1.2.1 Rich natural resources and electricity resources
Nigeria has large reserves of natural gas, which is the primary fuel for thermal power generation. The country's natural gas reserves are among the highest in the world. The abundant fuel resources make thermal power generation a reliable and readily available option to meet the country's growing electricity needs. Nigeria already has a well-developed thermal power generation infrastructure, including power plants, pipelines, and natural gas supply networks. This infrastructure lays the foundation for the continued dominance of thermal power generation. It enables efficient fuel supply, transmission, and distribution, making it cost-effective to operate and expand thermal power plants.
At the same time, the country has abundant renewable energy sources, including solar, wind, biomass and small hydropower (SHP). The widespread adoption of renewable energy will expand Nigeria’s power generation capacity, and the electricity market can increase its overall capacity to meet the growing demand for electricity.
1.2.2 Electricity prices are relatively low
Bitcoin miners use a lot of electricity, and electricity accounts for up to 80% of miners' operating costs, so access to cheap electricity is a key competitive advantage in mining. Compared with other countries, Nigeria's electricity prices are relatively low, as shown in the figure below, which shows the electricity prices of some countries in September 2023.
1.2.3 Suitable climate
Nigeria also has very suitable climatic conditions. The ideal temperature for mining is 5 to 25 degrees Celsius, which coincides with the average temperature in Nigeria. This is conducive to the stable operation and cooling of mining hardware systems.
1.2.4 Changes in government stance
The Central Bank of Nigeria (CBN) recently made a major shift in its stance on cryptocurrencies, moving from a blanket ban to the introduction of a structured regulatory framework for virtual asset service providers. This development is intended to keep up with the global trend of blockchain and digital assets. The CBN has established strict rules for financial institutions to deal with cryptocurrencies, marking a new era of digital finance in Nigeria and a major shift in its financial regulatory environment. As the country continues to explore this new area, the CBN is seeking to responsibly incorporate cryptocurrencies into its financial system, which is also conducive to the development of local cryptocurrency mining.
1.2.5 Cryptocurrency mining may alleviate local difficulties
Although Nigeria is the largest country in Africa in terms of GDP, it has a serious inflation problem. At the same time, the country’s foreign exchange controls restrict people from fighting inflation by exchanging foreign currencies, so residents hope to bypass currency regulation and avoid asset shrinkage. The decentralized and globalized nature of cryptocurrency is very much in line with the needs of local residents, which has also promoted the development of mining activities and cryptocurrency transactions in the local area.
2. Tax issues in cryptocurrency mining
The tax treatment of crypto-asset mining business mainly depends on the country or region’s definition of crypto-assets, asset classification, and recognition and measurement of mining income and expenses. The main types of taxes involved in mining income vary depending on the country or region.
The first is direct tax, which is income tax and capital gains tax levied on mining income. Most countries involved in mining business will treat mining income as business income of enterprises or individuals and impose corporate income tax or personal income tax. The income tax rate is determined based on the identity of the miner (individual or enterprise), income level, place of residence and other factors.
The second is indirect tax, which imposes value-added tax or goods and services tax on mining income. At present, various countries or regions have not yet reached a unified opinion on the collection of value-added tax or goods and services tax on mining income. In the European Union, most countries believe that mining business is not subject to value-added tax. Israel, based on the documents issued in 2017 on the taxation of virtual currency activities and other regulations, regards mining business as the provision of services and imposes a 17% value-added tax. New Zealand also regards mining business as a service and imposes a 15% goods and services tax.
There are also some countries that will impose consumption taxes on mining companies for considerations such as industry resource adjustments. For example, in the United States, the "Budget Supplementary Explanation Document" released by the U.S. Treasury Department in March 2023 proposed to levy consumption taxes in stages based on the cost of electricity used in cryptocurrency mining. Companies that carry out mining activities are required to report their electricity consumption and the type of electricity used.
3. Nigeria’s tax system
3.1 Tax system overview
Nigeria’s tax system is based on two types of taxes: direct taxes and indirect taxes. The main types of direct taxes are: corporate income tax, personal income tax, capital gains tax, oil profit tax and various miscellaneous taxes; the main types of indirect taxes are: value-added tax, import duties, consumption tax (goods tax) and stamp duty.
Nigeria has a relatively complete tax law system and implements a relatively systematic tax collection and management system. Corresponding to its three-level government management system, Nigeria’s tax collection and management departments are managed at the federal government, state government, and local government levels.
3.2 Taxes that may be involved in Nigerian cryptocurrency mining companies
3.2.1 Corporate income tax
The Corporate Income Tax Law stipulates that, except for exploration and production enterprises, corporate income tax shall be levied on the income or profits of various types of enterprises in Nigeria in accordance with the law. Nigerian companies shall pay corporate income tax on their profits from global operations, and non-Nigerian companies shall pay corporate income tax on certain income they obtain in Nigeria at a certain percentage, which shall be collected by the federal government. The corporate income tax rate for Nigerian residents is 30%, which is paid annually. If the annual turnover of non-resident enterprises operating in Nigeria exceeds 6 million naira, they shall pay a special tax of 15% of the turnover; if the annual turnover in the country does not exceed 6 million naira, they shall pay a special tax of 15% of 6 million naira, that is, 900,000 naira.
3.2.2 Value Added Tax
Nigeria’s VAT is levied on income from the sale of goods or provision of (independent) services, as well as on the importation of goods or services. Prior to February 1, 2020, Nigeria levied VAT at 5% of the face value of the invoice on existing taxable goods or services, including imported goods. Effective February 1, 2020, the standard VAT rate for all taxable goods and services increased from 5% to 7.5%.
3.2.3 Tariffs
Import duties are non-preferential and are equal for all countries. Depending on the goods, special duties or ad valorem duties are imposed, and the Naira is the legal tender for the taxes. Special duties are imposed on imported goods that the government believes are subject to dumping or abnormal subsidies, threatening existing or potential domestic industries.
3.2.4 Capital gains tax
Nigerian tax law provides that when a person disposes of shares valued at N100 million or more within any consecutive 12-month period, he shall be subject to a capital gains tax of 10%, unless the gains are reinvested in the shares of any Nigerian company.
4. Tax analysis of Nigerian cryptocurrency mining companies
After India, Nigeria has become the world's second largest user of cryptocurrency. The country has revoked the relevant ban established by the central bank in 2021, allowing financial institutions to trade with companies that provide digital currency services. Although relevant regulations in Nigeria remain strict, this is still a rare opportunity for the cryptocurrency industry, attracting many cryptocurrency mining companies to enter Nigeria. At the same time, some tax issues will inevitably be involved.
Nigeria implements a taxation principle that combines the territorial principle and the personal principle. Any company that earns income in Nigeria must pay income tax. Nigerian resident companies should declare and pay corporate income tax on their global income. Non-resident companies pay corporate income tax at a certain percentage on certain income they earn in Nigeria. Mining companies stationed in Nigeria pay corporate income tax on income earned in Nigeria in accordance with relevant income tax regulations.
The supply of electricity and other items is considered as providing goods and services and is subject to value-added tax. At the same time, cryptocurrency mining companies are extremely dependent on electricity, so mining companies may be indirectly involved in value-added tax, and the collection of value-added tax on power companies will indirectly affect mining companies.
Mining companies need hardware equipment, such as mining machines, to conduct their business. Due to the shortage of mining equipment in Nigeria, the import of professional equipment such as mining machines will also be involved, which means tariffs. Virtual currency mining machines are generally considered to be mechanical equipment in the manufacturing industry, and Nigeria also has specific regulations on import tariffs on mechanical equipment: the tariff on imported machinery and mechanical equipment is generally 5%-15%, but the import tariff on some machinery is zero, such as agricultural machinery and equipment.
New legislation stipulates that Nigeria will impose a 10% capital gains tax on cryptocurrencies. Former Nigerian President Muhammadu Buhari signed the Finance Act 2023 into law. The bill introduces a series of tax reforms aimed at modernizing the country's fiscal framework. Its provisions involve a 10% tax on gains from the disposal of digital assets, including cryptocurrencies. This comprehensive legislation aims to increase government openness, increase tax revenue and stimulate the economy, and the taxation of cryptocurrencies, whose value continues to rise, has become an inevitable legislative move. With this move, the Nigerian government not only hopes to provide a fair competitive environment for those who own digital assets. It also hopes that they will pay a fair share of taxes for the country's growth. This part of the tax will also affect companies engaged in mining activities.
Regarding the time point for recognizing mining revenue, many people believe that cryptocurrency mining represents intangible assets developed internally by mining companies. The computers, usage, and various employee costs invested by miners in construction and mining form internally developed intangible assets, so revenue or gains should be recognized when the cryptocurrency is subsequently sold. However, the Nigerian government has no clear regulations on this.
Finally, there are currently no clear regulations indicating that Nigeria currently has a tax incentive system for mining companies, but mining companies may be subject to some existing tax incentive policies. Therefore, mining companies should reasonably arrange their tax planning work within the framework of general tax incentive policies.
