## Crypto Poses Significant Tax Problems—and They Could Get Worse

_IMF Blog, July 5, 2023_

## Source details

**Canonical URL:** [Crypto Poses Significant Tax Problems—and They Could Get Worse](https://www.imf.org/en/blogs/articles/2023/07/05/crypto-poses-significant-tax-problems-and-they-could-get-worse)

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## Bibliographic details
- Authors: Katherine Baer, Ruud de Mooij, Shafik Hebous, Michael Keen
- Published: July 5, 2023

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### Overview
- 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.

### Classifying crypto
- 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.

### Revenue considerations and statistics
- 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.

### Addressing implementation challenges
- 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.

### Policy implications and recommendations
- 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.*

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## References

- [new paper](https://www.imf.org/en/Publications/WP/Issues/2023/06/30/Taxing-Cryptocurrencies-535510?cid=bl-com-WPIEA2023143)
- [El Salvador](https://www.imf.org/en/Blogs/Articles/2021/07/26/blog-cryptoassets-as-national-currency-a-step-too-far)
- [plunging](https://www.imf.org/en/Blogs/Articles/2023/01/18/crypto-contagion-underscores-why-global-regulators-must-act-fast-to-stem-risk)
- [calls for regulation](https://www.imf.org/en/Publications/Policy-Papers/Issues/2023/02/23/Elements-of-Effective-Policies-for-Crypto-Assets-530092?cid=pr-com-PPEA2023004)

_Source: https://www.imf.org/en/blogs/articles/2023/07/05/crypto-poses-significant-tax-problems-and-they-could-get-worse_