Experts have warned that the use of cryptocurrencies poses significant challenges to tax collection and administration.
They argue that the bewildering speed with which they have developed and the pseudonymity they can provide have left tax systems playing catchup.
According to a new paper on IMF Blog, they say the situation has left policymakers struggling to accommodate cryptocurrencies within their tax system.
It is estimated that a 20 percent tax on capital gains from cryptos would have raised about $100 billion worldwide amid soaring prices in 2021, which is about 4 percent of global corporate income tax revenues, or 0.4 percent of total tax collection.
“But with total crypto market capitalization down 63 per cent from the late-2021 peak, tax revenues would then have shriveled. If these losses were fully offset against other taxes, there would be a corresponding reduction in revenue. In more normal times and with the current market size, global crypto tax revenues would probably average less than $25 billion a year.
“There are also important fairness issues at stake. Though their pseudonymity makes it hard to be sure exactly who holds crypto, there are signs that ownership is heavily concentrated among the relatively wealthy—even though holding crypto is strikingly common across people with low incomes too.
“There is also VAT. Crypto transactions have similarities to those in cash in their potential for being hidden from tax administrations. Today, the share of purchases made with crypto is still small. But widespread use, if tax systems were not prepared, could someday mean widespread evasion of VAT and sales taxes, leading to materially lower government revenues. This may be the biggest threat from crypto,” the report showed.
The report noted that due to their ‘pseudonymous’ nature, it is difficult to tax crypto assets as most transactions use public addresses that are extremely difficult to link with individuals or firms.
“A more troubling possibility is that reporting rules (and the failures of some crypto intermediaries) could induce people to transact increasingly through decentralized exchanges or directly through peer-to-peer trades where no central governing body oversees these transactions. Those are still extremely difficult for tax administrators to penetrate.
“Given the complexity of the fundamental challenges posed by pseudonymity, the rapidity of innovation, the vast information gaps, and the uncertainties ahead, the tide has not yet turned in the battle to incorporate crypto properly into the wider tax system. Some of the elements needed for doing so—such as clarity in their classification for tax purposes—are clear.
“But the challenges are fundamental, and the risks, particularly to the VAT and sales taxes, may be greater than people recognize. As many (though far from all) governments are beginning to realize, policymakers need to develop clear, coherent, and effective frameworks for taxing crypto,” it added.
