IMF Paper on Taxing Bitcoin Sees 'Quasi-Anonymity' as Greatest Challenge

"Policymakers are struggling to accommodate cryptocurrencies within tax systems not designed to handle them; this paper reviews the issues that arise. The risks, for now, appear more latent than real. But this can change."

IMF Paper on Taxing Bitcoin Sees 'Quasi-Anonymity' as Greatest Challenge
  • "The greatest challenges are for implementation: [bitcoin]'s quasi-anonymity is an inherent obstacle to third-party reporting," the report states.
  • "This is because their essence, and the core motivation behind their development, is precisely to avoid placing trust in centralized institutions of a kind that might be able to provide information to the tax authorities, or perhaps to levy somekind of withholding tax."
"The good news for tax authorities, and regulators, is that contrary to the vision of the original [Bitcoin] designers - a core role has emerged for centralized institutions of various kinds in the transacting of crypto assets, notably exchanges through which they are bought and sold."
  • "Such institutions are in a position to obtain information on ownership, and so are at the core of current efforts, perhaps somewhat belatedly and certainly still incompletely, to obtain useful third-party information that can be shared with tax authorities."
"The use of intermediaries to either acquire or cash out [bitcoin] for fiat currency or other traditional instruments is a natural point for tax authorities to acquire information."
  • "The first step for governments, nonetheless, is to apply AML rules and third-party reporting requirements where they can, as the US has recently done. The risk, however, is that transactions will to some degree migrate to forms (on decentralized exchanges or directly peer-to-peer) that no third party even sees."
"Working in [tax administrators] favor is the vast amount of information publicly available in unpermissioned blockchains. This provides scope for the application of techniques that have been developed for the forensic analysis of blockchain structures."
  • "It might be, however - somewhat ironically, in terms of the original vision for [Bitcoin] - that investors come to place more trust in well-regulated institutions than in the ‘Wild West’ of decentralized trading."
"More speculatively, miners - who do see every transaction in non-stablecoins- might in principle be given a role in tax reporting/withholding, consistent with the general principle of tax administration favoring collection, where possible, at a relatively small number of upstream points."
  • "Design problems arise from cryptocurrencies’ dual nature as investment assets and means of payment: more straightforward is a compelling case for corrective taxation of carbon-intensive mining."
  • "The capital gains tax revenue at stake worldwide may be in the tens of billions of dollars, but the more profound risks may ultimately be for VAT/sales taxes."

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