You must have heard about mining of cryptocurrency but what about Validator node?

Recently, we were approached by a large multinational bank operating in the validator node business, seeking clarity on the applicability of UAE Value Added Tax (VAT) and Corporate Tax to their operations.

In this article, I’ll break down the basics of mining and validator node business, how these are different from one another and applicability of UAE Corporate Tax and VAT on validator nodes business.

Understanding UAE Taxes for Validator Node Businesses: A Guide for Tax Professionals

Crypto Mining:

What is Crypto Mining? Crypto mining uses proof-of-work (PoW), this is how some blockchains, like Bitcoin, verify transactions. Miners use powerful computers to solve tricky math problems, which keeps the network secure. In return, they earn rewards i.e. newly created coins (like 3.125 Bitcoin per block, worth about AED 1.03 million at current rate) plus small fees for each transaction they process.

Validator Node Business:

What is a Validator Node Business? Validator nodes work on blockchains that use proof-of-stake (PoS), like Ethereum or Solana. Instead of solving math problems, validators “stake” (lend or freeze just like Fixed deposit in bank) their cryptocurrency to help verify transactions. They earn rewards plus small transaction fees. Some businesses also offer “staking-as-a-service,” managing nodes for others and charging fees as a fixed % of the rewards.

Why Isn’t It as Famous as Mining?

Validator nodes became more common after blockchains like Ethereum switched to proof of stake model from proof of work model in 2022. Unlike mining, which needs big, noisy machines, validator nodes use much less power—about 100 watts per hour—and don’t get as much attention. They’re quieter, less energy-hungry, and more technical, so they don’t make headlines like mining does. Plus, risks like “slashing” (losing staked funds if you make mistakes) are also there in validator node business.

Mining vs Validator nodes: A quick comparison

In the UAE, zones like Abu Dhabi Global Market (ADGM), RAK Digital Assets Oasis free zone, supports blockchain projects. Validator nodes are a better fit in UAE as compared to mining because they’re cheaper to run and match the country’s focus on new tech.

How UAE VAT Applies to Validator Node Businesses

1. VAT on validator nodes service?

Validator nodes help blockchains by providing computing power and staked crypto, earning rewards in return. In UAE VAT law (Federal Decree-Law No. 8 of 2017), this counts as a “service,” so it’s taxable unless there’s an exception. Since validator services don’t qualify for exemptions (like healthcare) or zero rates (unless exported), they’re taxed at 5%.

- Receiving rewards from the network:

Running a validator node and receiving rewards from the network. Considering that the blockchain network on which validator node is being run will most probably be decentralized (i.e. not UAE based), it would be outside VAT scope. Though there is no clarity on this segment as per UAE VAT laws, however, drawing reference from the guide VATP039 on Cryptocurrency issued by UAE Tax Authority and international regulations, it should most likely be out of scope of UAE VAT as no identifiable recipient is there.

- Providing staking services to clients (Business vs. Individual Clients):

As per Federal Decree-Law No. 8 of 2017, this counts as service, subject to UAE VAT. Thus, as per place of supply rules in UAE VAT law, for clients in the UAE, 5% VAT should be applicable, and for clients outside UAE, it should qualify as zero rated supply and hence, 0% VAT should apply subject to specific conditions.

2. Getting VAT Back on Costs

Running a validator node means buying things like computers or softwares, where you pay VAT (called input tax). Since this service is taxable, you can get this VAT back as an input tax credit.

How UAE Corporate Tax Applies to Validator Node Businesses

1. What Is UAE Corporate Tax?

UAE Corporate Tax started on June 1, 2023 (Federal Decree-Law No. 47 of 2022). It taxes business profits exceeding AED 375,000 at 9%, and 0% for profits till AED 375,000. Free zone businesses might pay 0% on certain income, like exports.

2. Taxable Income

Validator nodes make money from staking rewards and fees:

- Staking Rewards: Rewards earned from staking own or clients crypto to run validator node business are taxed as income.

- Service Fees: Transaction fees from network or client’s stake are also taxed.

*Income such as mining, staking, trading of crypto assets is not classified in Qualifying activities list, hence, taxable at 9%.

Conclusion

Validator node businesses are a smarter choice to operate in the UAE because they fit the country’s tech goals, like the setups in ADGM, RAK Digital Assets Oasis. Both pay 5% VAT on rewards and 9% Corporate Tax on profits over AED 375,000 (or 0% in free zones for export income). As the UAE keeps growing as a crypto hub, understanding these new businesses will be key for staying ahead.