The DAME Tax Violates Miners' First Amendment Rights as Publishers
The White House's Council of Economic Advisors released a blog post touting the Biden Administration's proposed excise tax on "cryptomining," the "Digital Asset Mining Energy" or DAME tax. According to the CEA, "[a]fter a phase-in period, firms would face a tax equal to 30 percent of the cost of the electricity they use in cryptomining." Although the CEA estimates the tax "to raise $3.5 billion in revenue over 10 years," CEA expressly states "the primary goal of the DAME tax is to start having cryptominers pay their fair share of the costs imposed on local communities and the environment."
As applied to bitcoin proof-of-work, the DAME tax would violate the First Amendment. This is because:
- Proof-of-work miners are publishers that timestamp transactions and expressive data, collectively writing an immutable record of information.
- Energy is a universally accessible input that is consumed in that process of publishing.
- The Supreme Court has held that taxes on publishing inputs, like ink and paper, violate the First Amendment, especially when they are based on the content of the speech being published.
Proof of Work Miners Publish Facts and Opinions
The common misconception is that proof-of-work miners exist to issue new bitcoin. In reality, miners exist to secure the ledger and order transactions to prevent double-spending. They are incentivized to do this work through the issuance of new bitcoin. One, day, though, the bitcoin mining subsidy will end once the 21 million supply cap is reached, and miners will only be rewarded through transaction fees.
Miners order and secure the ledger by timestamping blocks of transactions (and other data, more on that shortly). In fact, Satoshi Nakamoto did not even use the phrase "miner" in the White Paper. Instead, they described the process as "publishing":
The solution we propose begins with a timestamp server. A timestamp server works by taking a hash of a block of items to be timestamped and widely publishing the hash, such as in a newspaper or Usenet post [2-5]. The timestamp proves that the data must have existed at the time, obviously, in order to get into the hash. Each timestamp includes the previous timestamp in its hash, forming a chain, with each additional timestamp reinforcing the ones before it.
To implement a distributed timestamp server on a peer-to-peer basis, we will need to use a proof-of-work system similar to Adam Back's Hashcash , rather than newspaper or Usenet posts.
Before Bitcoin, if you wanted to prove that digital documents existed before a certain time, you needed to generate a hash of that document and then publish that hash widely in some way, usually through newspapers like The New York Times. And by including in the hash of your document the hash of the previous tranche of documents that were published, you decrease the liklihood of tampering. The authors of two sources cited in the White Paper, Stuart Haber and W. Scott Stornetta created an authentication service (Surety.com) that did just that by publishing hashes in the New York Times.
Bitcoin replaced this centralized publishing system with a decentralized system of timestamping servers expending energy in a competition to win the right to write blocks to the chain, which makes alterations and tampering prohibitively costly.
In other words, Bitcoin replaced newspaper publishers and usenet forums with proof-of-work mining. Mining is just a new technology for widely publishing hashes of data in a specific order.
What kind of data do miners publish? Miners write the following data into blocks:
- The list of transactions;
- The block header, which includes timestamp, the protocol version, previous block’s hash (winning lottery number), block’s Merkle root (hash of the list summarizing the block’s transactions), the difficulty target number, and the nonce (the arbitrary number used as part of input for the proof-of-work computation);
- The generation or “coinbase” transaction (not to be confused with the company by the same name) that rewards the miner, comprised of transaction fees, block subsidy (currently 6.25 bitcoin), and miner’s bitcoin address to receive transaction;
- Coinbase data, which can include arbitrary messages from the miner.
While the blocks of data miners publish includes transactions, they can also contain expressive speech. An example of a political message in coinbase data is found in the genesis block itself, the first block mined by Nakamoto:
Another prominent example of expressive data in published blocks are inscriptions, which enable anonymous, non-financial speech to be embedded directly into the blockchain (like the text of the First Amendment, for example). Indeed, for this reason I have argued the code for the inscriptions client is inherently imbued with First Amendment significance, and that because inscriptions enable many new types of expression directly on the Bitcoin blockchain, they strengthen Bitcoin's protections under the Constitution.
The Supreme Court has long held “that the creation and dissemination of information are speech within the meaning of the First Amendment.” As demonstrated, proof-of-work mining on the Bitcoin network surely meets this definition.
The DAME Tax Singles Out "Cryptomining" Publishers for Financial Burdens
The DAME Tax places economic burdens on those companies running so-called "cryptomining" operations, which includes proof-of-work Bitcoin mining. The tax targets a direct input on proof-of-work publishing: energy.
In Minneapolis Star & Tribune Co. v. Minnesota Commissioner of Revenue, the Supreme Court invalidated a use tax on “paper and ink products consumed in the production of a publication.” This was a tax borne only by the press. Even though Minnesota did not impose an outright ban on specific content, the Court nonetheless found this economic burden, which applied differentially to the press, was unconstitutional.
Electricity is to a proof-of-work miner what paper and ink are to a newspaper publisher: a component consumed in the process of publishing. Like the use tax in Minneapolis Star & Tribune Co., the DAME tax imposes a financial burden borne only by a specific category of speaker ("cryptominers").
Because the DAME Tax requires an examination of the content of the data being processed before it is applied , it bears a striking similarity to a sales tax struck down in Arkansas Writers’ Project, Inc. v. Ragland, which taxed general interest magazines, but exempted newspapers, religious, professional, trade, and sports journals. The DAME Tax doesn't apply to all data processing or high compute companies (like those that run AI algorithms, for example, or graphics rendering farms), but only those securing digital asset protocols. In striking down such a content-based discriminatory tax, the Supreme Court held:
Indeed, this case involves a more disturbing use of selective taxation than Minneapolis Star, because the basis on which Arkansas differentiates between magazines is particularly repugnant to First Amendment principles: a magazine's tax status depends entirely on its content. Above all else, the First Amendment means that government has no power to restrict expression because of its message, its ideas, its subject matter, or its content. Regulations which permit the Government to discriminate on the basis of the content of the message cannot be tolerated under the First Amendment.
Like the magazine tax in Ragland, whether the DAME Tax's content-based financial burden would not survive constitutional scrutiny.
Miners securing digitial asset protocols such as Bitcoin through proof-of-work algorithms are publishers engaged in speech entitled to First Amendment protections of the highest order. Because of this, any law or regulation affecting proof-of-work miners must be generally applicable and content-neutral. If the federal government seeks to decrease energy usage for high-compute, it can only do so by taxing the entire data processing industry equally. This solution, while constituionally sound, would be economically unwise. Better policy should focus on incentivizing use of less fossil-intensive sources of electricity. And, of course, bitcoin mining is already doing that. Perhaps, as Nic Carter has suggested, instead of taxing bitcoin mining, the federal government should be subsidizing it.
At the end of the day, the DAME Tax is simply an unconstitutional infringement on miners' rights to free speech. And it's bad policy too.
Tip the Author through Lighting Addresses: ⚡firstname.lastname@example.org⚡
Or via QR code: