Reading 3 min Views 4 Published Updated
The International Monetary Fund (IMF) has realized that governments have yet to consider all ways of taxing cryptocurrencies, and the amount of unpaid or uncollected taxes can reach tens of billions of dollars. However, this understanding does little to reduce the variety of problems associated with the taxation of cryptocurrencies.
Cryptocurrency’s “semi-anonymity”, its dual nature as an investment vehicle and means of payment, and its high volatility make the task of tax collectors more difficult than they currently can, a new IMF working paper says. While there is no consensus even on how to tax cryptocurrencies – as income, capital gains (which is the most common) or gambling – and it does not help that tax systems were developed before the advent of blockchain technology, which expanded the range of assets that require separate consideration. .
The paper notes that cryptocurrency is not a particularly effective tax evader due to its high fees and volatility. However, if the potential to collect a tax on cryptocurrencies could be exploited, “corrective” taxation could help offset the undesirable effects of cryptocurrencies on macroeconomic factors as well as further environmental goals. The paper notes that environmental taxation is being explored, but additional mechanisms need to be considered.
The paper cites research on monitoring cryptocurrency transactions regarding statements by the US tax authorities. He showed that the market reacts to the instructions of the tax authorities, sometimes indicating new attempts at evasion.
Related: Kraken ordered court to disclose user data to IRS for tax compliance
There is “relatively little analytical work or empirical data to draw on,” although “massive amounts of data are in principle available on cryptocurrency transactions,” the IMF said in a statement. The popularity of cryptocurrencies in emerging economies, where collection technology may be limited, is another disadvantage, although even when cryptocurrencies are confiscated by, for example, the US Federal Bureau of Investigation, the method for doing so remains unclear.
“Policymakers are struggling to accommodate cryptocurrencies within tax systems not designed to handle them; this paper reviews the issues that arise.
The greatest challenges are for implementation: crypto’s quasi-anonymity is an inherent obstacle to third-party reporting.”… pic.twitter.com/qTCo6jnL6I
— Joshua Rosenberg (@_jrosenberg) July 5, 2023
In addition, the cryptocurrency market is divided between whales and small holders, which may also require separate consideration. The right tax structure is critical. For example, anonymous transactions may be subject to a flat tax. The problem is not anonymity, but technology:
“What prevents its anonymous implementation in the case of blockchain is the inability of the tax authorities to integrate into the chain.”
The desire to solve these problems is also a problem:
“Distributed ledger technology […] could ultimately prove useful for tax administration; and the use of smart contracts (self-executing programs) on blockchains, for example, could potentially help secure VAT compliance chains and enforce retention.”
The paper notes that centralized exchanges can give police more power than decentralized exchanges to comply with tax laws, although some work will need to be done to implement them. Mandatory anti-money laundering and Know Your Customer measures would be insufficient for tax reporting purposes, it argues.
Stricter reporting requirements for cryptocurrency miners will be the starting point for increased tax laws, the IMF said. Taxation of sales and value added has received little consideration and is a tangle of inconsistencies with regard to cryptocurrencies.