Cryptoasset mining and state tax incentives

Editor: Anthony S. Bakale, CPA

The popularity of blockchain and cryptoassets such as bitcoin has increased significantly over the past few years, as has their utility. Cryptoassets have become more mainstream, as evidenced by the fact that some financial institutions, including Goldman Sachs and Barclays, enable their customers to purchase them, and J.P. Morgan has created the “JPM coin,” a digital coin for payments. In addition, Coinbase, one of the largest cryptoasset exchanges, had an initial public offering in 2021. Cryptoassets also have been a focus of governments’ policymaking attention, with some placing regulations and prohibitions on owning cryptoassets.

This item describes state tax incentives available to businesses that operate data centers, including those used for cryptoasset “mining.”

Background

The bitcoin mining process is hardware- and energy-intensive, generally requiring graphics processing units (GPUs) or an application-specific integrated circuit (ASIC), which consumes significant quantities of energy. Hash-rate is the frequency at which the mining occurs and is dependent on the hardware used. According to one source, mining hardware with the greatest efficiency consumes only one watt of power for every gigahash (one billion hashes) of processing power. In early 2020, computers on the Bitcoin network were reportedly processing 120 exahashes (120 quintillion) per second, which would result in 63 terawatt-hours of electricity consumed in 2020. To illustrate the magnitude of energy consumption, 412 wind turbines could produce one gigawatt of power per second, which means the Bitcoin network would require 49,440 wind turbines running at peak performance 24 hours a day to meet the 63 terawatt hour per year demand. Consuming this much electricity causes these components to generate a significant amount of heat, also requiring investments in cooling solutions.

Blockchain has the potential to be used widely in all aspects of business, including supply chain, accounting, auditing, and tax.

State incentives for data centers

Several states have sought to generate jobs and tax revenue by creating incentive programs to attract data centers, including those used in cryptoasset mining. The form of the incentives varies from state to state. For example, Michigan, Ohio, and Wyoming offer sales tax exemptions, while Montana offers property tax abatements. Illinois offers both a sales tax exemption and an income tax credit, and several states offer grants for investment and job creation. Certain states may have operational eligibility requirements, such as Michigan, which requires that a certain percentage of data center revenues be generated from unrelated parties. To better illustrate these incentive opportunities, two states’ programs are outlined in more detail below.

Montana

Montana created a property tax classification for qualified data center equipment known as Class 17 property. To obtain this classification, a taxpayer must apply with the Montana Department of Revenue. Class 17 property includes:

• Land, improvements, and personal property;
• Cooling systems, cooling towers, and other temperature infrastructure;
• Power infrastructure; and
• Any other equipment necessary for the maintenance and operation of the facility.

Class 17 property is taxed at 0.9% of its market value rather than standard rates, which can be as high as 6% depending on the type of property.

The current requirements to qualify for this property tax abatement include:

• 25,000 square feet of new or expanded floor area; and
• $50 million of investment over a 48-month period.

As a point of clarification, the state has deemed “new or expanded floor area” to mean new construction or an addition to an existing structure.

Wyoming

Wyoming lawmakers voted against a repeal of the data center exemption in February 2021. Coupled with an agreed-upon number of jobs created and capital investment, the data center exemption provides for a sales tax exemption on purchases or rentals of:

• Qualifying prewritten and other computer software;
• Computer equipment including computers, servers, monitors, keyboards, and storage devices;
• Containers used to transport and house such computer equipment; and
• Other peripherals, racking systems, cabling, and trays.

To qualify for this exemption, the taxpayer must make an investment of not less than $5 million.

Wyoming allows an additional sales tax exemption when the investment is greater than $50 million on the following:

• Uninterruptable power supplies;
• Backup power generators;
• Specialized heating and air conditioning equipment; and
• Air quality control equipment.

Seeking a share of a growing business

Cryptoassets have gained momentum, and that momentum has brought computer processing advances and a new group of investors to the table. As blockchain technology becomes more widely used, the need for new investment will come with it. States continue to compete for new and expanded business via incentives. Coupled with other factors, such as no income tax in certain states, overall lower ambient temperatures in northern states to reduce costs of cooling, a low risk of natural disasters, or the availability of cheap electricity, the overall benefit for cryptoasset mining data centers of locating in states with incentive programs can be significant. (For more on cryptoasset mining, see White, “Gold and Bitcoin: Tax Implications of Physical and Virtual Mining,” also in this issue.)

EditorNotes

Anthony Bakale, CPA, is with Cohen & Company Ltd. in Cleveland.

For additional information about these items, contact Mr. Bakale at tbakale@cohencpa.com.

Unless otherwise noted, contributors are members of or associated with Cohen & Company Ltd.