A research paper published by the International Monetary Fund (IMF) warns that tax collection is significantly more challenging with cryptocurrency assets, and current tax systems are not designed to handle them. The IMF’s working paper emphasizes that certain crypto assets may not persist in the future, while others that endure become “fundamental innovations in decentralized finance.” Consequently, the IMF asserts that tax systems must adapt to cryptocurrencies with “coherence, clarity, and effectiveness.”
Crypto Assets Pose Tax Collection Hurdles, Warns IMF Working Paper
On July 5, 2023, the International Monetary Fund (IMF) released a working paper on taxation and cryptocurrency assets authored by Katherine Baer, Ruud de Mooij, Shafik Hebous, and Michael Keen. While published by the IMF, working papers are the opinions of the authors and do not necessarily reflect the views of the IMF, its executive board, or IMF management.
The authors observe that the current taxation framework is inadequate in many regions worldwide due to the dual nature of crypto assets, which can serve both as a currency and an investment. The IMF’s working paper further highlights that “crypto’s quasi-anonymity is an inherent obstacle to third-party reporting” significantly complicating tax collection. The investment and currency aspects introduce additional tax collection challenges in today’s modern world.
“Conceptually, the dual nature of cryptocurrencies as both investment assets and means of payment — the latter, though less prominent than the former, being a primary purpose for their development — creates potential difficulty in capturing capital gains and losses in their asset role without thereby constructing obstacles to their use as currency,” the IMF authors opine.
The IMF researchers caution policymakers to promptly address these concerns and familiarize themselves with the necessary corrective measures. The authors of the IMF paper also mention the concept of implementing a carbon tax on proof-of-work (PoW) cryptocurrency assets to “address the significant climate impact of proof-by-work consensus mechanisms.”
Although the working paper acknowledges tax evasion as a pressing issue, page 18 specifically addresses the “revenue potential” that tax collectors overlook concerning cryptocurrencies. Furthermore, the IMF paper references the blockchain surveillance company Chainalysis and its capability to “probabilistically” associate a crypto user with their country of origin.
The issue of crypto anonymity is described as a “fundamental obstacle to tax enforcement,” according to the IMF’s explanation on page 20. “Income can be hard to identify from transactions, and it is not simply that the tax authorities cannot identify individuals — nobody can,” the researchers elaborate. The IMF report emphasizes the need to maintain an ongoing focus on the realm of crypto asset transactions and taxation.
The researchers further argue that although data is limited, “there is strong evidence that crypto wealth is highly concentrated, even more so than ownership of equities.” Ultimately, the paper concludes by highlighting the challenge policymakers face in integrating cryptocurrencies into tax systems that currently lack the necessary tools to accommodate their existence.
