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Home Economy Digital Assets

Crypto Assets Projected to Generate $25b Annually in Tax Revenue

by Justice Godfrey Okamgba
July 7, 2023
in Digital Assets
0
Cryptocurrency, Cryptocurrencies
cryptocurrencies

cryptocurrencies

UBA
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According to the International Monetary Fund (IMF), governments worldwide could have potentially earned $100 billion in tax revenue from crypto assets in 2021.

However, due to the decline in the cryptocurrency market’s valuation over the past two years, the projected tax revenue has now been revised to an annual total of $25 billion.

In a report obtained by TechEconomy, highlighting the financial implications for governments in the crypto market, the IMF provided crude estimates, suggesting that a 20 percent tax on capital gains from cryptocurrencies could have generated approximately $100 billion globally during the period of soaring prices in 2021.

This amount corresponds to around 4 percent of global corporate income tax revenues or 0.4 percent of total tax collection.

However, with the total market capitalization of cryptocurrencies down by 63 percent from its peak in late 2021, the potential tax revenues have diminished accordingly. If these losses were offset against other taxes, there would be a corresponding reduction in revenue.

Considering the current market size, the IMF believes that global crypto tax revenues would likely average less than $25 billion per year, which is a relatively small amount in the broader context.

Tax Evasion

The IMF report identifies a major challenge in properly taxing crypto assets, namely, the pseudonymity offered by the crypto industry, which makes it difficult for governments to identify and tax cryptocurrency holders.

The report acknowledges that while around 10,000 people hold a quarter of all Bitcoin, their pseudonymous nature enables them to evade tax payments.

Another concern raised by the IMF is the potential for crypto transactions to be hidden from tax administrations, similar to cash transactions.

While the current share of purchases made with cryptocurrencies is still relatively small, widespread adoption without adequate tax system preparedness could lead to significant evasion of value-added tax (VAT) and sales taxes, resulting in decreased government revenues.

The IMF considers this to be the most significant threat posed by crypto assets.

To address these challenges, the IMF suggests implementing the “Know Your Customer” requirement as a means to identify and enforce tax compliance.

The report also recommends international cooperation among countries to report cryptocurrencies. However, the IMF acknowledges that such reports could potentially encourage crypto holders to limit their transactions to decentralized exchanges or increase their use of peer-to-peer trades, thus evading tax authorities.

The IMF emphasizes that the fundamental difficulty in taxing crypto assets lies in their pseudonymous nature, making it extremely difficult to link individuals or firms to specific crypto transactions.

While centralized exchanges can be subject to standard tracking rules and withholding taxes, the situation becomes more complicated with decentralized exchanges and peer-to-peer trades, which tax administrators find challenging to penetrate.

Given the complexity of these challenges, the IMF states that clear, coherent, and effective frameworks for taxing crypto assets are still lacking. Policymakers need to develop strategies to properly incorporate cryptocurrencies into the wider tax system, ensuring clarity in their classification for tax purposes.

The risks, particularly concerning VAT and sales taxes, may be greater than currently recognized, highlighting the need for proactive measures in addressing these issues

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  • Justice Godfrey Okamgba
    Justice Godfrey Okamgba

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Tags: CryptocurrencyIMF
Justice Godfrey Okamgba

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