One of the best things about Bitcoin and other cryptocurrencies is ownership. Once you secure the private keys to your wallet, no one can take your crypto. Many crypto users prefer cryptocurrencies because they don’t come with a tax. If you earn Bitcoin or Bitcoin Cash through mining, those freshly mined tokens are yours, and yours alone.
Except, when they’re not.
A quorum of Bitcoin Cash miners is proposing a controversial plan to donate 12.5 percent of the Bitcoin Cash coin reward to those developing on the Bitcoin Cash blockchain. So, what is the Bitcoin Cash tax, and should you worry?
What Is the Bitcoin Cash Mining Tax?
First things first: what is the Bitcoin Cash mining tax all about?
In late January 2020, Jiang Zhuoer, CEO of BTC.TOP, proposed that Bitcoin Cash (BCH) miners pay 12.5 percent of their mining rewards to a Hong Kong-based company. The idea is to provide additional funding to the Bitcoin Cash development team, as well as those developing apps on the Bitcoin Cash blockchain.
Jiang Zhuoer explained the rationale for the Bitcoin Cash mining tax in a Medium post. The crux of the issue centers on funding Bitcoin Cash’s infrastructure to ensure that BCH “remains a strong and vibrant cryptocurrency.” Zhuoer reasons that other cryptocurrency projects have fallen to the wayside because of the lack of coherent infrastructure development, and diverting a stipend of the Bitcoin Cash mining reward would provide “an adequate level of stable funding, allowing Bitcoin Cash to thrive and succeed.”
The Bitcoin Cash mining reward diversion would remain in place for six months. Zhuoer calculates that at the current Bitcoin Cash price of $300 per token, the Bitcoin Cash ecosystem would receive over $6 million. The Hong Kong holding company will distribute the funds, although how the company will dole out the funds is not yet confirmed.
When Does the Bitcoin Cash Mining Tax Start?
BTC.TOP is one of the largest Bitcoin Cash mining pools and is leading the way with the Bitcoin Cash mining tax. However, they’re not alone. Five other Bitcoin Cash mining pools have also agreed to levy the 12.5 percent tax on BCH miners, including Antpool, ViaBTC, and Bitcoin.com.
The BCH mining tax will begin on 15 May 2020 and will require a blockchain soft-fork to activate.
How Does the Bitcoin Cash Mining Tax Work?
There is another important piece of information in Jiang Zhuoer’s statement.
Because of the hash ratio between BTC and BCH, and the difficulty adjustments that maintain an equilibrium, it is the entire set of SHA-256 mining (including BTC mining) that bears the cost under this plan.
This is counterintuitive: With 12.5% of the Coinbase being donated, then on first glance, it would appear that BCH miners simply give up 12.5% of their rewards and would then lose 12.5% of their hash as well. However, after difficulty adjusts on BTC, it is a different story.
The rebalancing of the mining difficulty ratio across all cryptocurrencies using SHA-256 mining algorithms will see Bitcoin (BTC) miners bearing the “cost of the diminished profitability.”
But how will the Bitcoin Cash mining pools ensure everyone takes part?
To ensure participation and include subsidization from the whole pool of SHA-256 mining, miners will orphan BCH blocks that do not follow the plan. This is needed to avoid a tragedy of the commons.
The short answer is that if you’re using one of the six Bitcoin Cash mining pools that subscribe to the Bitcoin Cash mining tax, you have no choice.
Bitcoin Cash Mining Tax Reaction
As you can imagine, there is a mixed reaction to the introduction of a Bitcoin Cash mining tax.
The idea of a fund that enables Bitcoin Cash developers to continue evolving the BCH blockchain and ecosystem isn’t new. Calls for a development fund come and go, depending on the ebb and flow of the cryptocurrency markets. However, the development of the Bitcoin Cash blockchain should remain distinct from the price of the token, as should most blockchain development (focusing instead on the technology).
Bitcoin Cash developer Amaury Sechet (aka, deadalnix) believes a short mining tax period is exactly what the BCH blockchain needs. Sechet reasons that blockchain development is an ongoing process. As such, those developing the platform should receive, at the very least, some form of funding or the ability to draw on a fund when the time comes.
In addition, there are times when issues arise in the daily operation of a blockchain. The Bitcoin Cash blockchain is no different. What is different, however, is that there are now many more operations, apps, and businesses relying on the smooth operation of the BCH blockchain. When an issue arises, those using BCH want someone with experience to fix the issue quickly, which in turn requires extensive knowledge of the system and its quirks.
Perhaps most importantly, Sechet argues that Bitcoin Cash miners and users shouldn’t see the compulsory contribution as a tax. The implementation is a temporary cartel designed to help the Bitcoin Cash blockchain prosper. If the Bitcoin Cash blockchain and ecosystem prospers, so will the miners, developers, BCH token holders, and users.
In a free market, cartels tend to be fairly unstable
Which is completely true, without a doubt. In this case, the Bitcoin Cash miner tax is a temporary arrangement, the cartel agreement between six Bitcoin Cash mining pools “making sure that the infrastructure on top of which their business is built is robust, and remains so going forward.”
BCH Mining Tax Power Grab
Understandably, the reaction isn’t all positive. In the Bitcoin Cash subreddit, you can find many users voicing distaste for the temporary tax. That distaste is not unfounded.
Bitcoin Cash miners currently using those mining pools face the prospect of orphaned blocks if they do not agree with the implementation. The forced orphaning of a block is extremely controversial, allowing mining pools to decide which Bitcoin Cash blocks and transactions will process, and which to discard.
By extension, the soft-fork that implements the mining tax is also dangerous. A decision taken by mining pools controlling over 25-percent of the BCH hash rate will affect every Bitcoin Cash user, developer, and so on. (Unsure about hash rate? Check out our hash rate explainer!) There are already serious concerns regarding the centralization of the Bitcoin Cash blockchain and hash rate, and collusion between the top mining pools exemplifies the issue.
Furthermore, what is to stop the mining pool cartel from extending the tax beyond the initial six month period?
Bitcoin Cash Mining Tax Has Serious Implications
Zhuoer is acutely aware of the implications of the Bitcoin Cash mining tax. Centralizing a fund, taxing miners, and ultimately acting undemocratically are diametrically opposed to the central tenets of Bitcoin Cash and blockchain technology in general. These also represent a snippet of the reasons why Bitcoin Cash exists in the first place; breaking away from a perceived centralized decision-making process favoring certain interests.
Will Bitcoin Cash miners move away from Bitcoin Cash entirely? Or simply switch to a Bitcoin Cash mining pool that allows miners to claim the full coin reward?
Mining pools are important for Bitcoin Cash, Bitcoin, and other cryptocurrencies. Here’s how a mining pool operates and how to choose one that suits your hardware.
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