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The Biden administration recently announced plans to include a Digital Asset Mining Energy excise tax on electricity used for crypto mining in the Fiscal Year 2024 budget. The tax, which would be imposed at 30% on the electricity used by devices mining cryptocurrencies, chiefly targets blockchain protocols that make use of proof of work consensus algorithms.

The new tax sounds reasonable on its face. But in reality, it is late, administratively unworkable, and a bad use of political will and attention. If the goal is to offset climate change, there are cheaper, higher-value targets. Two good places to start: Tax the electricity usage of data centers and artificial intelligence.

The most glaring issue with the DAME tax is the lack of clarity on enforcement. There are basically two broad categories of crypto miners: those making use of retail CPUs and GPUS, such as Intel chips and Nvidia graphics cards, and those making use of purpose-built, application-specific integrated circuit chips.

The latter are mostly limited to massive mining farms, while the former is what youd be doing if you decided to make use of your gaming PC and do a little mining overnight. Theres no regulation or license requirement in either case, and there would be little to indicate to your local power company that youre miningoutside of your increased electricity usage.

One popular way to mine cryptocurrencies is to make use of a mining pool service that breaks up large computational tasks into smaller ones, distributes them out to individuals running the application on their computer, and pays those individuals commensurate with the amount of work they did solving said task. Outside of relying on the honor system, the only point in that process where mining could be monitored would be at the individual computer level. Unless the IRS is going to require all desktop computers that ship with an external GPU to have spyware installed to monitor for mining software, that isnt going to work.

There are so-called smart home energy monitors that connect to your circuit breaker box and detect minute fluctuations in energy usage and use those fluctuations to generate profiles of individual appliances. Over time, these devices can deduce when your refrigerator compressor cycles on, your dishwasher runs, or your desktop computer is pulling more power.

Its technologically conceivable, if practically improbable, that these devices could be required in every home connected to the grid and that information could be provided to the IRS for the purposes of the excise tax. However, a roll-out of that proportion likely would cost much more than the tax would ever raisemost crypto mining has moved away from the power-intensive proof of work consensus mechanism in favor of more efficient alternatives. Ultimately, it would only tell the IRS that the taxpayer was doing something resource-intensive on their computerwhich could run the gamut from actual cryptocurrency mining to video editing or AI image generation.

Photographer: Elijah Nouvelage/Bloomberg via Getty Images

AI is burgeoning, and crypto is faltering. So if the Biden administration is determined to create an excise tax that targets some high electricity using application of computers, AI is a good place to start. All those AI image-generating models, and even their large language model text-generation counterparts, require significant amounts of electricity. AI is all the rage, and to hear proponents tell it, youll soon be able to sit down and watch a real-time generated movie with yourself as the protagonist.

When that day comes, a server farm somewhere will be turning watts of electricity into heat and noise. An excise tax on AI now can be baked into the cost of doing business and offset the coming demand on the grid.

Of course, an excise tax on AI comes with the same administrative workability issues as those of cryptocurrency mining. How will the IRS determine whether a data farm is mining your personal information to serve better ads or generating a cool picture of an elven woman smoking a vape pen?

The only answer is to retarget the DAME tax on electricity usage by data centers more generally. This casts a wider net, avoids market distortion, and is infinitely more future-proof.

There are better sectors to target for an excise tax on electricity. The chemical industry is a massive drain on the grid behind only residential usage. Google is a massive user of electricity, as is Microsoft Corp.albeit increasingly of the green variety. Outside of a desire to constrain and depress the cryptocurrency sector, there would be no reason to suddenly target its electricity usage for a bespoke expensive, if not impossible, excise tax.

Whether through invention or acquisition, we can reasonably expect that data centers will be at the metaphorical center of new technologies for the foreseeable future. Let Meta Platforms Inc. and Google decide if AI is the future or if its the metaverse. If climate change is what were trying to offset, we dont really care what theyre using their electricity forjust that theyre using it.

If we want to regulate crypto, lets regulate crypto. Lets keep our excise tax powder dry and save it for applications where it has a chance of working and generating revenue.

Look for Leaheys column on Bloomberg Tax, and follow him on Mastodon at @andrew@esq.social.

Continued here:

Crypto Mining Electricity Excise Tax Should Target AI Instead - Bloomberg Tax