Cryptocurrency’s Popularity Fuels Global Tax Crackdown

LAGOS (Capital Markets in Africa) — Financial transactions involving virtual money are on the rise, and tax authorities in the U.S., EU, and Asia are stepping up efforts to grab their share of potentially billions of dollars in lost tax revenue from unreported gains.

Tracking anonymous virtual currency trades remains a major challenge—especially as cryptocurrency becomes more mainstream. Central banks, global services like PayPal Holdings Inc., and financial firms like Fidelity Investments are among the major institutions pursuing a larger stake in cryptocurrencies or adopting blockchain for their own ends. Tesla Inc. recently announced its plan to invest $1.5 billion in Bitcoin and begin accepting the cryptocurrency as a form of payment, sending prices soaring. As of February 22, Bitcoin prices hovered around $50,000.

Governments around the globe are taking note and coming up with new rules to report trades. For tax authorities, “that is the main point: to find out who is doing these transactions,” said Niklas Schmidt, partner at Wolf Theiss lawyers in Vienna who advises clients on cryptocurrency tax issues.

The stream of tax revenue remains largely untapped, and international groups see it as a major focus of their work now.

“We’ve put an end to bank secrecy. It’s certainly no time to open a new loophole or leave areas of the financial transactions not covered by transparency,” Pascal Saint-Amans, director of the OECD’s Center for Tax Policy and Administration, told Bloomberg Tax, adding, “it’s extremely important, and quite urgent” to make sure cryptoassets are subject to standard reporting requirements.

The Organization for Economic Cooperation and Development wants to introduce a framework this year for reporting of cryptocurrency transactions to tax authorities. The OECD and the EU also want an easier way for tax authorities to exchange information about virtual trades.

And an international crime-fighting task force called the J5—which includes the U.S., the U.K., Canada, the Netherlands, and Australia—plans to focus this year on cryptocurrency in the financial technology industry and possible cyber crime using the currency.

“It’s not anonymous. We’re out there, we’re watching, we’re watching everybody in this space internationally and domestically,” said Jim Lee, chief of the IRS Criminal Investigation Unit, at a press conference earlier in February.

“The J5 and other tax authorities have increased interest in virtual and crypto currency like Bitcoin for a number of reasons—the increased usage of the currency, the increased acceptance of the currency, and the increased value,” Justin Cole, communications and media lead for the J5, said.

Reporting Standards Coming
The OECD plans to update its Common Reporting Standard (CRS)—a financial reporting benchmark—this year so cryptocurrency intermediaries like exchanges share information with tax authorities. Officials would then send the information to a taxpayer’s resident country.

The U.S. has said it wanted to join an automatic exchange of information on crypto assets, but it isn’t part of the CRS, Saint-Amans said. The OECD is deciding whether the crypto reporting standard update would be part of the CRS, or something equivalent to it, to find a way to include the U.S., Saint-Amans said.

The Treasury Department didn’t respond to requests for comment.

The European Commission, meanwhile, is planning to release a public consultation on tax information exchange rules for cryptocurrency in the coming weeks, a spokesman said Feb. 12. Current rules don’t cover income derived from cryptocurrencies, the European Commission said in an outline plan released in November.

Asian Countries Take Action
While global guidelines are planned this year, crypto traders and users are facing the threat of more tax obligations and enforcement that can vary dramatically from country to country.

“The inconsistencies between countries makes it impossible for mass adoption,” Mazhar Wani, partner and FinTech leader at PwC in San Francisco, said. It’s also “very difficult and challenging for intermediaries and financial services and people that play in that space,” he added.

South Korea is developing rules that would require individuals earning more than 2.5 million won ($2,000) annually from trading to be taxed at 20%, a spokesperson for the Ministry of Economy and Finance said.

Taxes on virtual assets will take effect from Jan. 1, 2022. For virtual assets owned before the beginning of the tax schedule, authorities will consider the highest of either the market price as of Dec. 31, 2021, or the actual acquisition price, according to the ministry.

Japan is collecting information on crypto transactions and comparing them with tax returns, a tax authority official, who wished to remain anonymous, said.

Kenji Mori, spokesman at Taotao Inc, a Tokyo cryptocurrency exchange, said it advises clients to keep track of gains from their crypto transactions and even provides a software tool to make filing taxes on such transactions easier. “If our clients are not filing tax on his transactions, the tax agency will start investigation, so we are advising them to file tax properly,” Mori said.

“The tax authority is depending on the taxpayers’ tax filings and if the taxpayer does not file taxes on the profits from transactions, there is not much the tax authority can do. The tax agency is only going after the affluent segment of the crypto currency players,” said Nobuhiro Tsunoda, chairman of EY Tax in Japan and a former senior National Tax Agency official.

In India, tax professionals have heard speculation about an 18% consumption tax on cryptocurrency trading and gains ever since the supreme court struck down a ban on cryptocurrencies in March.

Talk of the consumption tax has “left many in a frenzy” because it would treat what was construed as a currency as a commodity instead, Sandeep Jhunjhunwala, partner at consultancy Nangia Andersen LLP, said.

U.K., U.S. Move Ahead
The U.K. tax authority, Her Majesty’s Revenue and Customs, clarified in 2019 that it believed gains made on crypto-to-crypto trades would be taxable, even if they had not been converted into a traditional currency first. In early January, it launched a public consultation into proposed new financial regulations for crypto assets.

HMRC has also launched a tender for a blockchain analysis tool to help inspectors investigate trading activity in the blockchain. Among its targets are traders who have made significant gains by trading between two types of cryptocurrency. The tax office has requested from several major U.K. crypto currency exchanges, including eToro and Cex.io, data on trades made on their platforms.

The U.S. is developing proposed regulations to require third parties, such as exchanges like Coinbase, to report on certain taxable cryptocurrency transactions. Although the rules are listed as a top priority for the Internal Revenue Service, Covid-19 relief work has forced that project onto the back burner.

The IRS—in 2014 guidance and in frequently asked questions on its website—has said virtual currency that can be substituted for cash is property for federal tax purposes, meaning users must recognize gain or loss on certain sales and exchanges. The agency recently began asking individuals who transact in the digital assets to disclose that on their tax returns, underscoring the U.S. government’s interest in cracking down on cryptocurrency tax evasion.

Canada, veering in the other direction, published a draft exemption for cryptocurrency transactions from its consumption tax in March 2019. The legislative proposal hasn’t been introduced in the House of Commons, but the government is committed to putting it in a bill, according to a Finance Ministry spokesman.

Source: Bloomberg Business News