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IMF wants Nigeria, others to charge VAT, income tax on crypto assets… Crypto poses significant tax problems

World Bank

The International Monetary Fund (IMF) has advised Nigeria and other countries to tax cryptocurrency transactions to raise government revenue.

IMF said countries can generate value-added taxes (VAT) and income tax from crypto assets, which could have amounted to $100 billion worldwide if a 20 per cent tax was placed on capital gain amid soaring prices in 2021.

In a report titled; “Crypto Poses Significant Tax Problems—and They Could Get Worse,” sent on Wednesday, IMF stated that governments need to address the challenges of taxing crypto assets, in order to prevent a leakage in tax revenue and protect the integrity of the tax system.

The cryptocurrency assets enjoyed a boom in 2021, with major crypto assets like Bitcoin, surging to nearly $70,000 in 2021, from $200 a decade ago, before plunging to around $29,000 recently.

IMF said a key issue is classifying crypto assets, either as a property or a currency, but suggested that capital gains should be taxed when a crypto asset is sold for profit, however, when it is used to make purchases, VAT should be collected.

“A key issue is how to classify crypto assets—should they be regarded as property or currency? When crypto is sold for profit, capital gains should be taxed as they would be on other assets. And purchases made with crypto should be subject to the same sales or value-added taxes, or VAT, that would be applied for cash transactions.

“So, one important task is to ensure application of these principles, which requires clarity on how to characterize crypto for tax purposes: in essence, as currencies for VAT and sales taxes and as assets for income tax purposes. While this is not easy due to the evolving nature of crypto asset transactions, it is perfectly possible. The deepest challenges are then in enforcement,” IMF said.

Crypto assets’ tax revenue is projected at $25 billion annually

While the IMF said governments globally could have generated $100 billion from taxing crypto assets in 2021, it stated that with the cryptocurrency market’s valuation down in the last two years, the tax revenue would be a combined $25 billion yearly.

Disclosing the financial benefits for governments in the cryptocurrency market and the loss so far, IMF said: “Crude estimates suggest that a 20 percent tax on capital gains from crypto would have raised about $100 billion worldwide amid soaring prices in 2021. That is about 4 percent of global corporate income tax revenues, or 0.4 percent of total tax collection.

“But with total crypto market capitalization down 63 percent from the late-2021 peak, tax revenues would then have shriveled. If these losses were fully offset against other taxes, there would be a corresponding reduction in revenue. In more normal times and with the current market size, global crypto tax revenues would probably average less than $25 billion a year. That, in the broader scheme of things, is not a huge amount.”

Major challenge in taxing crypto assets

In the report, IMF said the pseudonymity the crypto industry offers is a challenge to the government properly taxing holders of cryptocurrencies.

Cryptocurrency holders, who are both in upper and lower-class households, are largely unknown, making it difficult for the government to identify persons to tax in the crypto market.

Although 10,000 people hold one quarter of all Bitcoin, according to the IMF but their pseudonymity enables holders to evade tax payments.

“There is also VAT. Crypto transactions have similarities to those in cash in their potential for being hidden from tax administrations. Today, the share of purchases made with crypto is still small.

“But widespread use, if tax systems were not prepared, could someday mean widespread evasion of VAT and sales taxes, leading to materially lower government revenues. This may be the biggest threat from crypto,” IMF noted in the report.

Raising more concerns, the Fund said it is extremely difficult to link individuals or firms to crypto transactions, thus advising the “Know Your Customer” requirement as a way to identify and enforce tax compliance.

It also suggested synergy among countries to report cryptocurrencies, but it was also wary of the fact that the reports could encourage crypto holders to further limit their transactions to decentralised exchanges or increase their adoption of peer-to-peer trades.

“The most fundamental difficulty in taxing crypto assets is that they are “pseudonymous.” That is, transactions use public addresses that are extremely difficult to link with individuals or firms. This can make tax evasion easier. Implementation is thus at the heart of the matter for tax authorities.

“The problem is surmountable when people transact through centralized exchanges, since these can be made subject to standard “know your customer” tracking rules, and possibly withholding taxes. Many countries are putting such rules in place with the expectation that tax compliance will improve.

“However, reporting obligations could induce people to keep tax authorities ignorant by instead using centralized exchanges abroad. To address that concern, the Organisation for Economic Co-operation and Development has developed a framework for crypto-related exchange of information between countries. Implementation, however, is some way off.

“A more troubling possibility is that reporting rules (and the failures of some crypto intermediaries) could induce people to transact increasingly through decentralized exchanges or directly through peer-to-peer trades where no central governing body oversees these transactions. Those are still extremely difficult for tax administrators to penetrate.

“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. Some of the elements needed for doing so—such as clarity in their classification for tax purposes—are clear.

“But the challenges are fundamental, and the risks, particularly to the VAT and sales taxes, may be greater than people recognize. As many (though far from all) governments are beginning to realize, policymakers need to develop clear, coherent, and effective frameworks for taxing crypto,” IMF noted in the statement.