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Assuming that more than half of the Bitcoin miners pay taxes on revenue gained, could a increase in income tax laws (or similar) cause those ethical miners to go out of business? ... and the Bitcoin network to be more vulnerable to attack?

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Bitcoin mining doesn't need miners who comply regulations. The hashes from a Bitcoin miner that does not report any income are no different from the hashes produced by a Bitcoin miner that is fully compliant. – Stephen Gornick Nov 23 '12 at 2:11
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@StephenGornick: OP's point was that some miners would have to quit, thus the overall hashrate will be lower. – Meni Rosenfeld Nov 23 '12 at 5:09

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up vote 4 down vote

Taxes are paid on profits, not revenues. If their mining operation was profitable before, it will remain so even after the tax increase. Also, depending on the kind of tax it could increase equally to any alternative occupation they might have, so there would be no reason it should make any miner operation go out of business; definitely not enough to warrant concerns about the network security.

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Taxes aren't only paid on profits. For example, in NZ, Goods and Services Tax adds 15% to the cost of computer equipment. Tax paid in that way can only be recovered if GST is collected on sale of goods or services through the same business. With mining, it's likely that little or no GST would be collected. – Highly Irregular Dec 11 '12 at 18:18
@HighlyIrregular: Is that anything like a VAT? I know that in Israel, you pay 17% VAT on everything, but you can cancel the VAT you paid against the VAT you need to collect for revenues, so in the end you still effectively only pay it for profits. – Meni Rosenfeld Dec 12 '12 at 5:49
Yes, it sounds essentially the same. My understanding is that, depending on the tax law, in some cases it's still possible to make a loss and have a substantial tax bill. I can't see it being bad enough to affect network security though. – Highly Irregular Dec 12 '12 at 9:17
up vote 1 down vote

Bitcoin mining flows the path of least resistance.

So if taxes on mining proceeds are high in one area, mining operators that are fully compliant with the tax laws (reporting as income all of their profits -- a big if), then those miners may not be able to compete against a mining operator that isn't burdened with the high taxes or those who don't report the income.

Thus mining capacity will always grow to the level afforded by the block reward subsidy plus the transaction fees. If that capacity is forced to leave one jurisdiction it will pop up in another, less-restrictive jurisdiction.

Even if the mining pools were to start reporting mining income to the state, there are options such as solo mining, or P2Pool which generate mining revenues directly to the miner.

So even in highly taxed jurisdictions it is unlikely tax laws targeting bitcoin mining revenues would have much of an effect.

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Taxes are paid on profits, not revenues. If a miner can compete (that is, turn a profit) without taxes, he can compete with taxes - he'll just have less net income to spend on consumer goods. It's not like, say, power costs which could take someone from the black to the red. To a 1st order approximation, anyway - there could be tactical considerations relating to the specific tax structure. – Meni Rosenfeld Nov 23 '12 at 5:13

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