Crypto Poses Significant Tax Problems—and They Could Get Worse

IMF Blog, July 5, 2023

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Crypto assets that can be used as instruments of payment have proliferated into more than 10,000 variants since the 2009 debut of Bitcoin, the first and still the largest.
The pseudonymity and rapid innovation in crypto have left tax systems playing catch up.
A coherent way to tax crypto assets is needed to prevent revenue leakage and protect the integrity of the tax system.

Key classification issue: should crypto assets be regarded as property or currency?
Principles proposed:
- When crypto is sold for profit, capital gains should be taxed as they would be on other assets.
- Purchases made with crypto should be subject to the same sales or value-added taxes (VAT) that would be applied for cash transactions.
- In essence: characterize crypto as currencies for VAT and sales taxes and as assets for income tax purposes.
Noted difficulties:
- Evolving nature of crypto asset transactions makes characterization challenging, but the paper states it is "perfectly possible."
- The deepest challenges are in enforcement rather than classification.

Example price history cited: Bitcoin soared from $200 a decade ago to nearly $70,000 in 2021 before plunging to around $29,000 today.
Crude estimate: a 20 percent tax on capital gains from crypto would have raised about $100 billion worldwide amid soaring prices in 2021.
- This $100 billion estimate equals about 4 percent of global corporate income tax revenues, or 0.4 percent of total tax collection.
Market contraction: total crypto market capitalization down 63 percent from the late-2021 peak.
- With those losses fully offset against other taxes, there would be a corresponding reduction in revenue.
Current scale: in more normal times and with the current market size, global crypto tax revenues would probably average less than $25 billion a year.
Distributional note: available surveys indicate that about 10,000 people hold one quarter of all Bitcoin.
VAT risk: share of purchases made with crypto is still small today, but widespread use without preparedness could lead to widespread evasion of VAT and sales taxes, potentially materially lowering government revenues.

Fundamental difficulty: crypto assets are "pseudonymous"—transactions use public addresses that are extremely difficult to link with individuals or firms, making tax evasion easier.
Centralized exchanges:
- Problem is surmountable when transactions occur through centralized exchanges because these can be subject to standard "know your customer" tracking rules and possibly withholding taxes.
- Many countries are putting such rules in place with the expectation that tax compliance will improve.
- Risk: reporting obligations could induce people to use centralized exchanges abroad to avoid domestic reporting.
- OECD has developed a framework for crypto-related exchange of information between countries, but implementation is some way off.
Decentralized exchanges and peer-to-peer trades:
- Reporting rules and intermediary failures could shift activity to decentralized exchanges or direct peer-to-peer trades.
- These transaction modalities are extremely difficult for tax administrators to penetrate.

Policymakers need to develop clear, coherent, and effective frameworks for taxing crypto while use is still limited to prevent revenue leakage.
Essential elements highlighted:
- Clarity in classification for tax purposes (currencies for VAT/sales tax; assets for income tax).
- Strengthening enforcement mechanisms, particularly around exchanges and cross-border information exchange.
- Anticipating and addressing the VAT and sales-tax risks posed by potential widespread use of crypto.
The challenges are fundamental due to pseudonymity, rapid innovation, vast information gaps, and uncertainties ahead; proactive policy and international cooperation are implied as necessary responses.

Source: Crypto Poses Significant Tax Problems—and They Could Get Worse, Katherine Baer, Ruud de Mooij, Shafik Hebous, Michael Keen, July 5, 2023.