What taxes are involved in mining in Nigeria? Nigeria cryptocurrency tax study

Author | TaxDAO-Ray

As of 2023, Nigeria is the second largest country in the world for Bitcoin usage, with 22 million cryptocurrency holders, accounting for 10% of the total population. Nigeria ranks 11th in the 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 it consumes a large amount of electricity resources, while Nigeria's power supply remains tight. Additionally, the government was concerned that cryptocurrency mining could affect the stability of the domestic currency. However, the Nigerian government's stance on cryptocurrency has recently softened, as it lifted the ban on crypto trading in December 2023, which will also benefit the development of cryptocurrency mining.

1. Cryptocurrency Mining

1.1 Conditions for Cryptocurrency Mining

Early Bitcoin mining could be done using ordinary personal computers, but as mining difficulty increased, specialized mining hardware known as ASIC (Application-Specific Integrated Circuit) became the mainstream choice. ASIC devices are specifically designed for Bitcoin mining and are many times more efficient than general-purpose hardware. Additionally, 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 facilities, efficient cooling technologies such as liquid cooling are used alongside traditional air conditioning.

Bitcoin mining is an energy-intensive process. Mining equipment runs continuously 24 hours a day, consuming a large amount of electricity, making electricity costs one of the key factors affecting mining profitability. Mining in areas with lower electricity prices can significantly reduce costs and increase mining returns.

1.2 Advantages of Cryptocurrency Mining in Nigeria

1.2.1 Abundant Natural Resources and Energy Resources

Nigeria has significant natural gas reserves, which are the main fuel for thermal power generation. The country's natural gas reserves rank among the top in the world. The abundance of fuel resources makes thermal power generation a reliable and readily available option to meet the country's growing electricity demand. Nigeria already has a well-established thermal power infrastructure, including power plants, pipelines, and a natural gas supply network. This infrastructure lays the foundation for the continued dominance of thermal power generation, enabling 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 hydropower (SHP). The widespread adoption of renewable energy will expand Nigeria's power generation capacity, allowing the electricity market to increase its overall capacity to meet the growing electricity demand.

1.2.2 Relatively Low Electricity Prices

Bitcoin mining machines consume a large amount of electricity, with electricity costs accounting for up to 80% of miners' operating costs. Therefore, obtaining cheap electricity is a key competitive advantage in mining. Nigeria's electricity prices are relatively low compared to other countries, as shown in the following chart of electricity prices in some countries as of September 2023.

1.2.3 Suitable Climate

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

1.2.4 Shift in Government Stance

The Central Bank of Nigeria (CBN) has recently undergone a significant shift in its stance on cryptocurrency, 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 trends in blockchain and digital asset development. The CBN has established strict rules for financial institutions handling cryptocurrencies, marking a new era for digital finance in Nigeria and a significant change in its financial regulatory environment. As the country continues to explore this new field, the CBN is seeking to responsibly incorporate cryptocurrencies into its financial system, which will also benefit the development of local cryptocurrency mining.

1.2.5 Cryptocurrency Mining May Alleviate Local Challenges

Although Nigeria is the largest economy in Africa by GDP, it faces serious inflation issues, and the country's foreign exchange controls limit people's ability to combat inflation through currency exchange. Therefore, residents hope to bypass currency regulation and avoid asset depreciation. The decentralized and global nature of cryptocurrencies aligns well with the needs of the local population, which has also driven the development of mining activities and cryptocurrency trading in the area.

2. Tax Issues in Cryptocurrency Mining

The tax treatment of cryptocurrency mining businesses mainly depends on the definition of cryptocurrencies, asset classification, and the recognition and measurement of mining income and expenses in the respective country or region. Mining income varies by country or region, and the types of taxes involved also differ.

First, there are direct taxes, which include income tax and capital gains tax on mining income. Most countries involved in mining activities treat mining income as business income for enterprises or individuals, subjecting it to corporate income tax or personal income tax. The income tax rate is determined based on the miner's identity (individual or corporate), income level, and residence.

Second, there are indirect taxes, which include value-added tax (VAT) or goods and services tax (GST) on mining income. Currently, there is no unified opinion among countries or regions regarding the imposition of VAT or GST on mining income. In the European Union, most countries believe that mining activities are not subject to VAT. Israel, however, treats mining activities as a service and imposes a 17% VAT based on regulations issued in 2017 regarding taxation of virtual currency activities. New Zealand also considers mining activities as services and imposes a 15% GST.

Some countries may impose excise taxes on mining companies for reasons such as industry resource adjustments. For example, in the United States, the U.S. Treasury Department's "Budget Supplementary Document" released in March 2023 suggested a phased excise tax based on the electricity costs used in cryptocurrency mining, requiring companies engaged in mining activities to report their electricity consumption and the type of electricity used.

3. Nigeria's Tax System

3.1 Overview of the Tax System

Nigeria's 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 profits tax, and various miscellaneous taxes; the main types of indirect taxes include value-added tax, import duties, excise taxes (goods tax), and stamp duties.

Nigeria has a relatively complete tax legal system and implements a systematic tax collection system, corresponding to its three-tier government management system. The tax collection departments in Nigeria operate under a three-tier management system involving the federal government, state governments, and local governments.

3.2 Taxes That Cryptocurrency Mining Companies in Nigeria May Incur

3.2.1 Corporate Income Tax

The Corporate Income Tax Act stipulates that, except for exploration and production companies, corporate income tax is levied on the income or profits of various types of enterprises operating within Nigeria. Nigerian companies are required to pay corporate income tax on their profits from global operations, while non-Nigerian companies are required to pay corporate income tax on certain income earned in Nigeria at a specified rate, collected by the federal government. The corporate income tax rate for Nigerian resident companies is 30%, payable annually. Non-resident companies with annual turnover exceeding 6 million Naira from operations in Nigeria are required to pay a special tax of 15% on their turnover; if the annual turnover does not exceed 6 million Naira, they are required to pay a special tax based on 6 million Naira at 15%, which amounts to 900,000 Naira.

3.2.2 Value-Added Tax

Nigeria's value-added tax is levied on the sale of goods or the provision of (independent) services, as well as on imported goods or services. Before February 1, 2020, Nigeria levied VAT at a rate of 5% on taxable goods or services based on the invoice amount, including imported goods. Since February 1, 2020, the standard VAT rate for all taxable goods and services has been increased from 5% to 7.5%.

3.2.3 Customs Duties

Import duties are non-preferential and apply equally to all countries. Depending on the type of goods, specific duties or ad valorem taxes are levied, with Naira as the legal currency for tax payments. Special duties will be levied on imported goods that the government deems to be subject to dumping or abnormal subsidies, threatening existing or potential domestic industries.

3.2.4 Capital Gains Tax

Nigerian tax law stipulates that when disposing of shares valued at 100 million Naira or more within any continuous 12-month period, the disposer must pay a capital gains tax of 10%, unless the gains are reinvested in shares of any Nigerian company.

4. Tax Analysis for Cryptocurrency Mining Companies in Nigeria

After India, Nigeria has become the second largest country in the world for cryptocurrency usage. The country has lifted the relevant ban imposed by the central bank in 2021, allowing financial institutions to engage in transactions with companies providing digital currency services. Although Nigeria's relevant regulations remain strict, this presents a rare opportunity for the cryptocurrency industry, attracting many cryptocurrency mining companies to Nigeria, which inevitably involves some tax issues.

Nigeria implements a combination of territorial and personal principles for tax collection. Any enterprise that earns income within Nigeria is required to pay income tax. Nigerian resident companies must report and pay corporate income tax on their global income, while non-resident companies must pay corporate income tax on certain income earned in Nigeria at a specified rate. Mining companies operating in Nigeria must pay corporate income tax on income earned within Nigeria according to the relevant income tax regulations.

The supply of electricity and other goods and services is subject to VAT, and since cryptocurrency mining companies are highly dependent on electricity, mining companies may indirectly be involved in VAT. The imposition of VAT on electricity companies indirectly affects mining companies.

Mining companies require hardware equipment, such as mining machines. Due to the scarcity of mining equipment within Nigeria, this also involves the issue of importing mining machines, which means customs duties are applicable. Virtual currency mining machines are generally considered machinery and equipment in the manufacturing industry, and Nigeria has specific regulations regarding import duties on machinery: the import duty for machinery and equipment generally ranges from 5% to 15%, but some machinery imports are duty-free, such as agricultural machinery.

New legislation stipulates that Nigeria will impose a 10% capital gains tax on cryptocurrencies. Former Nigerian President Muhammadu Buhari signed the "2023 Finance Act," making it law. This act introduces a series of tax reforms aimed at modernizing the country's fiscal framework. It includes provisions for taxing gains from the disposal of digital assets (including cryptocurrencies) at a rate of 10%. This comprehensive legislation aims to increase government transparency, boost tax revenue, and stimulate the economy, making the taxation of increasingly valuable cryptocurrencies a necessary legislative measure. Through this move, the Nigerian government hopes to provide a fair competitive environment for those holding digital assets and ensure they contribute a fair share of taxes to the country's growth. This tax revenue will also impact companies engaged in mining activities.

Regarding the timing of income recognition from mining, many opinions suggest that cryptocurrency mining represents internally developed intangible assets by mining companies. The costs incurred by miners, including computer usage and various employee costs, contribute to the construction and mining of these internally developed intangible assets, so income or gains should be recognized when the cryptocurrency is subsequently sold. However, the Nigerian government has not provided clear regulations on this matter.

Finally, there are currently no explicit regulations indicating that Nigeria has a tax incentive system specifically for mining companies, but mining companies may be eligible for some existing tax incentive policies. Therefore, mining companies should reasonably arrange their tax planning work within the framework of general tax incentive policies.