Written by: FinTax
With the surge of blockchain technology, cryptocurrency mining companies have become a global investment hotspot. In this digital gold rush, the United States is rapidly emerging as a global leader in cryptocurrency mining, leveraging its unique advantages—a friendly regulatory environment, low energy costs, and a trend towards localized manufacturing driven by geopolitical factors. According to data from the White House Office of Science and Technology Policy, as of 2022, the United States accounted for over 37.84% of the global Bitcoin mining hash rate, ranking first in the world, while attracting dozens of publicly listed companies to compete for a stake, with the industry landscape of cryptocurrency mining expanding at an unprecedented pace.
However, beneath this prosperous scene, domestic mining companies in the United States that mine and directly sell cryptocurrencies are facing the dilemma of double taxation. The cryptocurrency earned from mining must be reported for income tax at fair market value at the time of acquisition; and when sold in the future, any appreciation relative to the acquisition value is subject to additional capital gains tax. This layered tax burden objectively brings a heavy tax load to cryptocurrency mining companies. However, through appropriate tax arrangements, mining companies can reasonably and legally reduce substantial tax payments, transforming the original tax burden into additional competitiveness.
1. Comparison of Capital Gains Tax Systems: United States, Singapore, Hong Kong
The cryptocurrency tax policies of different jurisdictions vary. The United States treats cryptocurrencies as property, and the income from their sale or exchange is subject to capital gains tax. The appreciation of corporate (default C corporation) assets is taxed at a federal uniform rate of 21%, while individuals are subject to different tax rates based on the holding period: short-term holdings (less than one year) are taxed at the highest ordinary income tax rate of 37%, and long-term holdings (more than one year) enjoy a preferential tax rate of 15% to 20%. Whether occasionally selling coins for cash or frequently trading or operating, U.S. tax law treats all taxable transactions equally—if a taxable transaction occurs and profits are made, tax must be reported. This 'tax on every gain' tax system design places significant tax pressure on domestic cryptocurrency investors and miners in the United States.
In contrast, the capital gains tax policies in Singapore and Hong Kong are much more favorable. Currently, neither region imposes taxes on individual and corporate capital gains from non-recurring investments in cryptocurrencies. This means that as long as the relevant transactions are recognized as investment income under capital items, investors do not need to pay taxes on the appreciation portion of their assets, thereby truly realizing a zero tax rate benefit for long-term holdings. Of course, if the taxpayer's behavior is deemed frequent trading or a business operation, they will have to pay corporate (or personal) income tax on their profits. The Singapore tax authority taxes at approximately 17% corporate income tax, while individuals are subject to a progressive tax rate of 0%-24% based on income level; Hong Kong taxes profits from regular cryptocurrency trading (with a corporate tax rate of 16.5% and a personal tax rate of 15%). Although frequent traders still need to pay taxes, the rates in Hong Kong and Singapore undoubtedly possess stronger competitiveness compared to the U.S.'s highest 37% personal tax rate or 21% federal corporate tax.
2. Taking Advantage of Singapore: An Option for U.S. Mines
Based on the differing tax systems of various jurisdictions, a tax arrangement scheme tailored for U.S. cryptocurrency mining companies has emerged. Taking a Bitcoin mining company in the U.S. as an example, it can legally reduce the tax pressure from cryptocurrency appreciation by establishing a cross-border structure: the company can set up a subsidiary in Singapore, first selling the Bitcoin earned from daily mining at fair market price to that subsidiary, which then sells to the global market. Through this 'internal then external' transaction arrangement, the U.S. parent company only needs to pay corporate income tax on the initial mining income, while the appreciation profits held by the Singapore subsidiary may have the opportunity to apply for capital gains tax exemption under certain conditions, thus avoiding capital gains tax.
The tax-saving effect brought by this structural design is evident. Since Singapore does not impose capital gains tax on the appreciation portion obtained from the resale of long-held cryptocurrency assets, the profit from the sale of Bitcoin by the Singapore subsidiary is almost tax-free locally. In contrast, if a U.S. company directly holds Bitcoin until it appreciates and sells it domestically, this portion of the appreciation income is subject to a long-term capital gains tax of up to 21%. By transferring the price appreciation phase to a jurisdiction that exempts capital gains tax, the overall tax burden of the mining company can be significantly reduced, freeing up more funds for reinvestment or shareholder dividends, thus creating greater profit potential for the enterprise.
3. Risk Warning: Multiple Considerations for Tax Arrangements
It is important to emphasize that any tax arrangement must be conducted within a legal and reasonable framework. To achieve the tax effects described in the above scheme, transaction pricing and business substance must be meticulously arranged to ensure compliance with local regulations. For example, on one hand, U.S. tax law has strict transfer pricing regulations for transactions between related enterprises, requiring that all related transactions be conducted at fair market prices, or else face serious tax audits and penalties. On the other hand, Singapore's tax authorities will also evaluate the nature of the subsidiary's Bitcoin sales based on the frequency and purpose of the transactions to determine whether the proceeds belong to capital gains or business income. Only appreciation profits recognized as investment in nature can enjoy tax exemption. Therefore, this cross-border structure requires the support of professional tax arrangements and compliance operations to ensure that the scheme achieves tax saving objectives without triggering compliance risks.
4. Conclusion
This article shares only a preliminary idea of tax arrangements. In practice, the business model of cryptocurrency mining companies, the composition of shareholders, state laws, and international tax agreements, among other factors, all influence the design of the optimal scheme. Tax arrangements are not a one-size-fits-all formula; they need to be 'customized' to the specific circumstances of the enterprise.
