IMF paper highlights challenges in taxing crypto assets

Digital assets require separate treatment under outdated tax systems

Governments face significant challenges in taxing crypto assets, with the potential loss of tens of billions of dollars in tax revenue, according to a new working paper from the International Monetary Fund (IMF).

The paper highlights the complexities associated with taxing cryptocurrencies, including their semi-anonymity, dual nature as investments and means of payment, and high volatility.

Furthermore, the emergence of blockchain technology has created a range of assets that require separate treatment under tax systems that were designed before its advent.

While crypto is not an efficient means for tax evasion due to high fees and volatility, the IMF suggests that if crypto tax collection could be harnessed, it could be used for “corrective” taxation to offset the undesired impact of crypto on macroeconomic factors and promote ecological goals. However, more mechanisms for green taxation must be considered.

The paper acknowledges the lack of analytical work and empirical evidence on taxing cryptocurrencies, despite the vast amount of available transaction data.

The popularity of crypto in emerging economies, where collection technology may be limited, poses an additional challenge. The IMF also highlights the need for separate treatment of whales and small holders in the crypto market.

The paper suggests several measures for improving tax compliance, including imposing a flat-rate tax on anonymous transactions and implementing greater reporting requirements for crypto miners. It also emphasizes the importance of updating tax systems to address the challenges posed by crypto assets, which have proliferated into over 10,000 variants since the debut of Bitcoin in 2009.

Another key issue highlighted in the paper is the classification of crypto assets. The question is should they be treated as property or currency. Capital gains should be taxed when crypto is sold for profit, and purchases made with crypto should be subject to sales or value-added taxes. Clarity on how to characterize crypto for tax purposes is crucial, but enforcement remains a significant challenge.

The paper concludes that tax systems need to be updated and clear frameworks developed to properly incorporate crypto into the wider tax system. Failure to do so could lead to significant tax revenue leakage and evasion, particularly in relation to value-added taxes and sales taxes.

Despite the evolving nature of crypto transactions and the difficulties posed by pseudonymity, it is possible to address these challenges through implementation measures such as tracking rules and international exchange of information.

At the same time, in February the IMF released new recommendations advising governments against granting legal tender status to Bitcoin and other cryptocurrencies.

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Written by Silvia Pavlof

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