In a recent working paper, the IMF has acknowledged the intricate nature of taxing crypto, highlighting governments' insufficient measures in addressing the diverse taxation methods for crypto assets. The IMF cautions that the uncollected taxes on crypto transactions could potentially reach a staggering sum of tens of billions of dollars. However, finding viable solutions remains a significant challenge.
The unique characteristics of crypto, including their semi-anonymity, dual nature as investments and payment methods, and high volatility, pose significant hurdles for tax collectors. One major obstacle is the absence of a consensus on how to tax cryptos—whether as income, capital gains, or gambling.
While crypto's high fees and volatility make it less attractive for tax evasion, the IMF suggests that if the potential for crypto tax collection can be harnessed, "corrective" taxation could help counterbalance the undesired macroeconomic effects of crypto and support environmental goals. The paper also highlights the exploration of green taxation, although additional mechanisms must be considered.
Research cited in the paper examines crypto transactions relative to tax authorities' statements in the United States, demonstrating that the market does respond to regulatory guidance, sometimes leading to new evasion attempts.
Despite the vast amount of transaction data available in principle, the IMF observes a need for more analytical work and empirical evidence in this area. The popularity of cryptos in emerging economies, where collection technology may be limited, presents another challenge.
Additionally, the paper raises concerns about the ambiguous methods of seizing crypto assets, as exemplified by the recent actions of the US Federal Bureau of Investigation.
The IMF stresses that the implementation of crypto taxation is the greatest challenge. The quasi-anonymity of crypto transactions poses an obstacle to third-party reporting. Proper tax design is crucial, imposing a flat-rate tax on anonymous transactions.
The paper suggests that distributed ledger technology and smart contracts within blockchains could ultimately prove valuable for tax administration, facilitating VAT compliance and enforcing withholding.
Centralised exchanges may offer more opportunities for policing tax compliance than decentralised exchanges, but further work is needed for effective implementation. The paper also argues that more than mandatory Anti-Money Laundering and Know Your Customer measures are needed for tax reporting.
To enhance tax compliance, the IMF proposes increasing reporting requirements for crypto miners and addressing the inconsistencies surrounding sales and value-added taxation in relation to cryptos.
As governments grapple with these challenges, finding appropriate solutions to tax cryptos effectively remains a pressing issue that requires careful consideration and international collaboration.
The writer is the founder at yMedia. He ventured into crypto in 2013 and is an ETH maximalist. Twitter: @bhardwajshash