What taxes are involved in mining in Nigeria? Research on cryptocurrency taxes in Nigeria

Author|TaxDAO

1. Crypto Mining

1.1 Conditions for Cryptocurrency Mining

In the early days, Bitcoin mining could be done with a regular personal computer, but as mining difficulty increased, specialized mining hardware ASIC (Application-Specific Integrated Circuit) became the mainstream choice for mining. ASIC devices are designed specifically for Bitcoin mining and are much more efficient than general-purpose hardware in terms of mining efficiency. At the same time, efficient mining operations generate a lot of heat, so effective cooling systems are crucial to maintaining stable operation of mining hardware. In some large-scale mining facilities, 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 continuously 24 hours a day consumes a large amount of electricity, and the cost of electricity becomes one of the key factors affecting mining profits. Mining in areas with lower electricity prices can significantly drop costs and increase mining revenue.

The advantages of cryptocurrency mining in Nigeria 1.2

1.2.1 Abundant natural resources, power resources

Nigeria has abundant natural gas reserves and is the main fuel for thermal power generation. The country’s natural gas reserves rank among the top in the world. The abundant fuel resources make thermal power generation a reliable and readily available choice to meet the country’s growing electricity demand. Nigeria already has a well-developed infrastructure for thermal power generation, 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 the operation and expansion of thermal power plants cost-effective.

Meanwhile, the country has abundant renewable energy sources, such as solar, wind, biomass, and small hydro power (SHP). The widespread adoption of renewable energy will increase Nigeria’s power generation capacity, and the electricity market can improve its overall capacity to meet the growing demand for electricity.

1.2.2 Electricity prices are relatively low

Bitcoin miners consume a large amount of electricity, with electricity accounting for up to 80% of miners’ operational costs, so obtaining low-cost electricity is a key competitive advantage in mining. Nigeria’s electricity prices are relatively low compared to other countries, as shown in the graph below for September 2023.

1.2.3 Suitable Climate

Nigeria also has very suitable climate conditions. The ideal temperature for mining is 5 to 25 degrees Celsius, which coincides with the average temperature in Nigeria. This is beneficial for the stable operation and cooling of mining hardware systems.

1.2.4 Government’s Change in Position

The Central Bank of Nigeria (CBN) recently underwent a major shift in its stance on cryptocurrencies, transitioning from a complete ban to introducing a structured regulatory framework for virtual asset service providers. This development is aimed at keeping up with the global trend of blockchain and digital asset development. CBN has established strict rules for financial institutions dealing with cryptocurrencies, signaling a new era for Nigeria’s digital finance and a significant transformation in its financial regulatory environment. As the country continues to explore this new field, CBN is seeking to responsibly incorporate cryptocurrencies into its financial system, which also benefits the development of local crypto mining.

1.2.5 Crypto Mining May Alleviate Local Dilemma

Despite being the largest economy in Africa, Nigeria is facing serious inflation issues. At the same time, the country’s forex controls limit people from using foreign currency to hedge against inflation. Therefore, residents hope to bypass currency regulations and avoid asset depreciation. The decentralized and global nature of cryptocurrencies is in line with the local population’s needs, which has also driven the development of mining activities and cryptocurrency trading in the area.

2. Taxation Issues of Crypto Mining

The tax treatment of encrypted asset mining business mainly depends on the definition and classification of encrypted assets in the country or region, as well as the recognition and measurement of mining income and expenses. The types of taxes involved in mining income vary depending on the country or region.

First, there are direct taxes, namely income tax and capital gains tax on mining income. In most countries involved in mining businesses, mining income is treated as business income for enterprises or individuals and subject to corporate income tax or personal income tax. The income tax rate is determined based on the miner’s identity (individual or enterprise), income level, place of residence, and other factors.

Next is indirect taxes, which levies value-added tax or goods and services tax on mining income. At present, there is no unified opinion on the value-added tax or goods and labor service tax levied on mining income in various countries or regions. In the European Union, most countries believe that mining operations are not subject to value-added tax. Israel regards mining operations as providing services and levies a 17% value-added tax based on regulations such as the 2017 tax on virtual currency activities. New Zealand also regards mining operations as services and levies a 15% goods and labor service tax.

Some countries, for reasons such as industry resource adjustment, will impose consumption tax on mining companies. For example, in the United States, the “Budget Supplementary Statement” issued by the US Department of the Treasury in March 2023 proposes to levy consumption tax in stages based on the electricity cost used in cryptocurrency mining, and companies conducting 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

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

Nigeria has a relatively complete tax law system and a relatively systematic tax collection and management system, corresponding to its three-tier government management system. The tax collection and management departments in Nigeria are managed at the federal, state, and local government levels.

3.2 Tax Categories Possibly Involved in Nigerian Crypto Mining Enterprises

3.2.1 Corporate Income Tax

The Companies Income Tax Act provides that, except for exploration and production companies, companies of all types operating in Nigeria are subject to corporate income tax on their income or profits obtained within Nigeria. Nigerian companies are required to pay corporate income tax on their global profits, while non-Nigerian companies are required to pay corporate income tax on certain income obtained in Nigeria at a certain rate, levied by the federal government. The tax rate for Nigerian resident companies is 30%, payable annually. Non-resident companies operating within Nigeria with an annual turnover exceeding 6 million Naira are subject to a special tax of 15% on the turnover; if the annual turnover within Nigeria does not exceed 6 million Naira, a special tax of 15% on 6 million Naira, which is 900,000 Naira, is payable.

3.2.2 Value-Added Tax

Value-added tax in Nigeria is levied on the sales of goods or provision of (independent) services, as well as on imported goods or services, etc. Prior to February 1, 2020, Nigeria levied a value-added tax of 5% on taxable goods or services based on the face value of the invoice, including imported goods. From February 1, 2020, the standard value-added tax rate for all taxable goods and services increased from 5% to 7.5%.

3.2.3 Tariffs

Import tariffs are non-preferential tariffs and are equal for all countries. Depending on the goods, special duties or ad valorem taxes are levied, using the Naira as the legal currency for payment of taxes. Special tariffs will be imposed on imported goods that the government considers to have dumping or non-normal subsidy behavior, which threatens existing or potential domestic industries.

3.2.4 Capital Gains Tax

According to Nigerian tax laws, when disposing of shares with a value of 100 million naira or more within any consecutive 12 months, the disposer is required to pay a capital gains tax of 10%, unless the proceeds are reinvested in shares of any Nigerian company.

4. Nigerian Cryptocurrency Mining Enterprise Tax Analysis

After India, Nigeria has become the second largest cryptocurrency user in the world. The country has lifted the ban imposed by the central bank in 2021, allowing financial institutions to engage in transactions with companies providing digital currency services. Although the regulations in Nigeria are still strict, this is still a rare opportunity for the cryptocurrency industry, attracting many crypto mining companies to settle in Nigeria, inevitably involving some tax issues.

Nigeria implements a combined principle of territorial and personal taxation. Any enterprise earning income within the territory of Nigeria is required to pay income tax. Nigerian resident enterprises should declare and pay corporate income tax on their global income, while non-resident enterprises should pay corporate income tax at a certain rate on certain income obtained in Nigeria. Mining enterprises stationed in Nigeria are required to pay corporate income tax on income obtained within Nigeria according to relevant income tax regulations.

The supply of electricity and the like is classified as the provision of goods and services, which are subject to value-added tax. At the same time, crypto mining enterprises are highly dependent on electricity, so mining enterprises may indirectly involve value-added tax, and the imposition of value-added tax on electricity enterprises indirectly affects mining enterprises.

Mining companies need hardware equipment to carry out their operations, such as Mining Rigs. Due to the scarcity of mining equipment in Nigeria, there is also the issue of importing specialized equipment such as Mining Rigs, which involves customs duties. Virtual Money Mining Rigs are generally considered as mechanical equipment in the manufacturing industry, and Nigeria has specific regulations on the import duties of mechanical equipment: the import duties for machinery and mechanical equipment are generally 5%-15%, but some machinery imports are duty-free, such as agricultural machinery equipment, etc.

The new legislation stipulates that Nigeria will impose a 10% capital gains tax on cryptocurrencies. The former Nigerian President, Muhammadu Buhari, signed the “2023 Finance Act” into law. The act introduces a series of tax reforms aimed at modernizing the country’s fiscal framework. It specifies the imposition of a 10% tax on proceeds from the disposal of digital assets, including cryptocurrencies. This comprehensive legislation aims to increase government transparency, boost tax revenues, and stimulate the economy. Taxing the continuously rising cryptocurrencies has become an inevitable measure in the legislation. Through this, the Nigerian government not only hopes to provide a fair competitive environment for those holding digital assets but also expects them to contribute a fair share of taxes to the country’s growth. This tax will also affect enterprises engaged in mining activities.

Regarding the timing of recognizing mining income, many believe that crypto mining represents intangible assets developed internally by mining enterprises. The computers, electricity, and various costs invested by miners are used to build and mine, forming intangible assets developed internally. Therefore, income or gains should be recognized when the cryptocurrency is subsequently sold. However, the Nigerian government has not provided specific regulations on this matter.

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

References

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.Zheng Mengya, Wang Keko, Wang Zheny, Yan Huqin. (2021). Research on the tax issues of cryptocurrency under the digital economy background–taking the mining mechanism of Bitcoin as an example. World Economic Exploration. 2021, 10(1):1-8.[2]

.Hexun.com. (2024) BIT Mining deploys five Mining Rigs in Nigeria, promoting local renewable energy and digital economy.[3]

.Precise market intelligence and advisory.(2023).Nigeria Power Sector Market Size and Share Analysis - Rise Trends and Forecasts (2024-2029)[4]

.cryptopolitan. (2024) Nigeria has changed its stance on cryptocurrencies through a new regulatory framework.[5]