Cryptocurrency mining is a hot topic both in Serbia and abroad. Before we move on to the specific reasons why cryptocurrency mining is profitable, we need to define what cryptocurrency mining means in general. In particular, we need to start from the most popular cryptocurrency and define what bitcoin mining is. In addition, we will point out the equipment, i.e. machines needed for cryptocurrency mining.

What is cryptocurrency mining?

Persons who mine bitcoin, i.e. their computers, use special software to solve mathematical problems. By solving mathematical problems, they maintain the bitcoin network, i.e. approve transactions on the bitcoin network. When a computer solves a specific mathematical problem first, it approves an individual transaction and it is rewarded for its work with a certain number of bitcoins. This system is an elegant way of issuing bitcoin while motivating as many people as possible to mine bitcoin. Thus, bitcoin mining is actually a side effect of the bitcoin transaction verification process. Of course, anyone who mines bitcoin did not start doing it out of a desire to verify transactions, but to earn bitcoin. This system is also useful for people who do not mine bitcoin but only use it, because the more people there are engaged in bitcoin mining and thus network maintenance, the more stable and secure the bitcoin network. The Bitcoin network is programmed to automatically make mathematical problems harder, depending on how quickly computers solve them. As mentioned, the computer that first solves the mathematical problem is rewarded with bitcoin.

In order to increase their chances of solving a specific mathematical problem, people who wish to mine bitcoin faster, invest in special chips, or simply put, they are buying equipment that will be a bitcoin mining machine. At this point, it is important to note that, in addition to chips, you also need a specialized computer that will be connected to that equipment. This computer is called a mining rig. Thus, a cryptocurrency mining rig is a computer connected to a number of mining chips. In just over two weeks, 19,000,000 bitcoin will be mined, out of a total of 21,000,000, which is the maximum in the bitcoin network. It is coded that the last bitcoin will be mined in 2140. As no cryptocurrency is completely the same, the mining of Ethereum, the second most valuable cryptocurrency, is not the same as the mining of bitcoin. Ethereum is popular because of its additional functionality compared to bitcoin, which is that the Ethereum network is a platform for smart contracts. Smart contracts are also recognized in the Law on Digital Assets. Special chips (ASICs) will not be used for Ethereum mining at all. Such chips are used exclusively for bitcoin mining. In that sense, Ethereum mining is slightly different from bitcoin mining, primarily in technical terms.

In theory, telephone mining is also possible. However, cryptocurrency mining over the phone reduces the chances of cost-effectiveness because specialized chips mine bitcoin much faster than the programs that exist on the phone. Therefore, mining over the phone will lead to the accelerated discharge of the battery on the phone without efficient use of energy consumed, because mining over the phone will lead to very little profit, if at all.

Is cryptocurrency mining (e.g. bitcoin) legal in Serbia?

After the introduction, which explains what it means to mine cryptocurrencies and especially bitcoin, an important topic is the legality of such mining. By adopting the Law on Digital Assets, Serbia has legalized the mining of cryptocurrencies, including bitcoin. Article 6 paragraph 2 of the Law on Digital Property prescribes that cryptocurrency mining is legal in Serbia. It is additionally prescribed that persons who acquire cryptocurrency by mining can freely dispose of that cryptocurrency.

Reasons why cryptocurrency mining in Serbia is more profitable compared to other countries:

1. Regulated cryptocurrency and digital assets market

As already stated, The Republic of Serbia is one of the few countries that adopted the Law on Digital Assets and thus regulated the digital assets market. The existence of the law contributes to the legal security of short-term investors who trade using the rise and fall of cryptocurrency prices, long-term investors who believe in the technology underlying a particular cryptocurrency and its long-term value (so-called hodlers), and cryptocurrency miners. The Law explicitly stipulates that "mining" of cryptocurrencies is allowed in Serbia, but that other provisions of that law do not apply to miners, at that early stage. The Law states that it applies only to the use of services derived from cryptocurrency that is mined, so if there is a service derived from crypto mining (utility tokens), the relevant chapter of the Law applies. Certainly, the Law prescribes that miners can freely sell the acquired cryptocurrency on the market (OTC - over the counter), ie. by a stock exchange or intermediary. Therefore, mining cryptocurrencies is legal in Serbia.

This type of regulation is suitable for investing in crypto mining because such work is explicitly allowed by law, without specially prescribed restrictions.

With regard to taxes, it is prescribed that the capital gains tax will be applied to digital assets as well as their mining, that is, capital gains tax has a decisive impact on the profitability of the business. Capital gains tax is determined by calculating the difference between the buying and selling price of a cryptocurrency. In the case of mining, the way of acquiring is not buying but creating crypto, the so-called mining, so, for the purpose of taxation, mining costs (electricity etc.) are considered as the purchase price. Therefore, the Law on Personal Income Tax, which prescribes the capital gains tax, prescribes that the purchase price of a cryptocurrency, in the case of mining, is the amount of costs that the person had for the purpose of cryptocurrency mining. For example, it could be electricity consumption among other costs.

With regard to legal entities, the Law on VAT stipulates that this tax is not calculated or paid during the trade of cryptocurrencies. It is especially important to emphasize that this tax exemption applies to cryptocurrencies but not to digital tokens.

2. Profitability (low price of electricity - about 6 RSD / kW, i.e. about 6 cents, openness to foreign investments etc.).

The price of electricity in the Republic of Serbia is comparatively lower than in most Central and Eastern European countries, while, at the same time, Serbia is a country with high growth in all sectors. The Republic of Serbia is open to foreign investments, for which it allocates subsidies. Citizens of most countries can enter Serbia without a visa, while everyone can establish a legal entity in Serbia (e.g. LLC) and thus start their business venture. Due to all the above, Serbia is an excellent location for investment from an economic point of view, while the existing regulations regarding digital assets make it even more attractive. What is especially interesting for people who want to mine cryptocurrencies is the consumption of electricity and the price of a kilowatt of electricity in the country where they mine cryptocurrency. Serbia is one of the countries with a low price of electricity, so this profitability factor (electricity consumption) would represent a comparative advantage of Serbia in relation to many other countries.

3. The regulated market of solar panels enables the production of electricity in order to further reduce costs during mining.

The adoption of the Law on the Use of Renewable Energy Sources in 2021 introduces the possibility of more efficient use of renewable energy sources even by individual households. Solar power plants are a chance to produce the necessary electricity for more cost-effective cryptocurrency mining. This is another way in which the consumption of electricity, necessary for the mining of cryptocurrencies, can represent a comparative advantage of Serbia, because at the same time with the consumption of electricity, the production of electricity can be efficiently organized.

4. Affordable real estate in rural parts of the country

Although prices in urban areas are constantly rising and reach record amounts from month to month, real estate prices in rural areas, except for agricultural land, are still not high and allow the profitable purchase of large real estate to store computers that mine cryptocurrencies, aka mining rigs, their cooling systems, maintenance etc. Rural parts are, through the proper infrastructure, well connected to the cities.

Therefore, mining crypto in Serbia, contingent on the substantial initial investment, is an exciting business opportunity.

This blog is for informational purposes only and does not constitute legal service, as each situation requires a commitment to the specific circumstances of an individual case, which may be different from others.

For legal assistance, tailored to your needs, contact the Law Office Pekić at: [email protected]

Author: attorney at law Stefan Pekić, law office Pekic