IMF: Authorities lost up to $323B in potential digital asset taxes in 2021

Getting your Trinity Audio player ready...

The International Monetary Fund (IMF) believes that tax agencies lost up to $323 billion in 2021 from the digital asset industry.

In a recent paper, the IMF delved into the complexities and challenges of taxing digital assets, from pseudonymity to a lack of global definitions and classifications for the asset class.

Whether crypto assets ultimately boom or bust, governments need to tax them in a coherent way. Read more in #IMFblog. https://t.co/avTy4iBr3H

— IMF (@IMFNews) July 6, 2023

Titled “Taxing Cryptocurrencies,” the working paper claims one of the key challenges in taxing digital assets is classification. As assets, they would be subject to income tax, while as currencies, they would be subject to sales tax and VAT. Most tokens usually fall under multiple categories depending on the application, making the classification complex.

Despite the complexities, the IMF’s “crudest back-of-envelope calculations” found that a 20% capital gains tax on digital assets would have raised a hefty $323 billion, or 12% of the global corporate income tax in 2021.

If a 0.1% securities trading tax extended to digital assets, authorities would have raked in $15.8 billion in 2021, while a 5% VAT would yield $118 billion.

These figures would have dipped significantly last year as most tokens lost over 70% of their value in the “crypto winter.”

Despite the rosy projections, the IMF acknowledged that comprehensively taxing digital assets would be a massive task.

“The most fundamental difficulty in taxing crypto assets is that they are pseudonymous. This can make tax evasion easier. Implementation is thus at the heart of the matter for tax authorities,” the paper said.

The IMF says that pseudonymity is best addressed by having investors trade on centralized exchanges that collect KYC (Know Your Customer) data. But even this has its loopholes, including the use of off-shore exchanges, which are harder to crack down on.

Investors could also turn to decentralized exchanges or peer-to-peer trading; some governments, like Belarus, are banning the latter to crack down on crime.

“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.”

Eswar Prasad: The future of money through blockchain and digital currencies