Bitcoin mining is a process that anyone can participate in by running a computer program. Although Bitcoin can be mined using a traditional computer, some businesses have designed specialized Bitcoin mining hardware that can process transactions and build blocks much faster (and more efficiently) than regular computers. The process of validating transactions and committing them to the blockchain involves solving a series of specialized math problems.
Each Bitcoin miner is competing with all the other miners on the network to be the first miner to correctly assemble the outstanding transactions into a block by solving those specialized math problems. In exchange for validating the transactions and solving these problems, Bitcoin miners are rewarded for all of the transactions they process. They receive fees attached to all of the transactions that they successfully validate and include in a block. In addition to transaction fees, miners also receive an additional award for each block they mine.
This block reward is also the process by which new bitcoins are created, as specified by the Bitcoin protocol. Currently, that reward is 12.5 new bitcoins (worth over $US51,000 at time of writing) for each block mined.
Because the reward for mining blocks is so high, the competition to win that reward is also high. At any moment, hundreds of thousands of supercomputers all around the world are competing to mine the next block and win that reward. In fact, the total power of all the computers mining Bitcoin is over 1000 times more powerful than the world’s top 500 supercomputers combined. And the competition doesn’t stop—the Bitcoin network has gotten stronger and stronger over the past several years, growing by as much as 10 percent per month.
The block reward if received by you personally would of course be classified as assessable income where you live (taxable income = assessable income less allowable deductions). If you want to minimize the tax that would otherwise be payable on those rewards what you can do is:
- Set up a tax free Offshore Company eg an International Business Company (“IBC”)
- Include a (tax haven based) Nominee Director and Nominee Shareholder as part of the Corporate structure so that the Company is seen to be managed and controlled from Offshore
- Have the IBC buy the Computer and operating software
- You lease the computer and the software
- All such lease payments would be received Offshore and banked tax free
- You could/would/should claim a tax deduction at home for those lease payments
Alternatively you could establish the IBC as a Bitcoin mining Company and have it employ/engage you as an authorized miner. You could be paid a percentage of fees generated or a fixed rate or a combination of the 2. The income you generate from this would of course be assessable income where you live, but the remainder of Bitcoin mining profits could be banked and or reinvested Offshore potentially tax free.
Domestic laws can effect the viability of such a structure. Hence you should seek local legal and financial advice before committing to incorporate an IBC for such purposes.