Standard Kepler

Tax Pressure Could Spell End to Crypto Anonymity

12/03 – 12/09

Standard Kepler Research - Crypto Taxation
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WEEKLY RECAP

  • Total market cap. reached $111bn (a 18.3% decrease), and 7 day trading volume slumped 7.4% for top 100 crypto


WEEK AHEAD

  • 12 Dec: IOTA at London Hard Fork Decentralized
  • 15 Dec: XMR at XMR Privacy Summit in Phoenix


THOUGHTS OF THE WEEK

We expect tax evasion to put crypto taxation in the spotlight in 2019, and difficulties for tax agencies to obtain information on taxable crypto transactions to drive stricter KYC & AML measures. The U.S. IRS clarified as early as 2014 that “virtual currencies which can be converted into traditional currency are considered property for tax purposes and that a taxpayer can have a gain or loss on the sale or exchange of a virtual currency.” Despite this, the IRS estimates that only 0.2% of Coinbase users between 2013-2015 reported crypto gains or losses for each of those years. It has further been estimated that American’s owe US$25bn in crypto related tax for 2017.

The relatively anonymous nature of cryptocurrencies makes it difficult for tax authorities to sanction tax evaders. As illustrated by the case “United States v. Coinbase Inc.”, the IRS had to use legal means to extract relevant taxpayer information from Coinbase. The issue grows more severe in cross-border transactions, as it is unclear if and how the IRS can obtain taxpayer information from exchanges outside of U.S. jurisdiction. Japan’s Tax Commission has proposed a simplified tax filing process for digital assets, and it recognizes the potential difficulties to taxpayers in determining crypto tax liabilities. This is partly due to the inconsistencies of historical transaction data offered by different crypto platforms.

We are of the opinion that cryptocurrencies will have to adapt to existing tax and regulatory frameworks to ever achieve widespread adoption. The issue could potentially be solved via new currencies, that offer selective transparency to relevant authorities (such as tax agencies) by including a public key of the relevant authority in the transaction. International frameworks will also have to evolve, and national leaders recently made calls for crypto tax reforms at the G20 Summit in Argentina. Expect to see stricter KYC & AML measures to unveil privacy, as this can provide tax agencies with much needed taxpayer information. Case in point being the Japanese National Tax Agency’s new powers to request information on bank accounts that are accused of being linked to crypto tax evasion. We stress the importance to holders of cryptocurrencies to be cognizant of the reporting of digital asset gains or losses on their tax returns, and the importance of informing tax advisors of taxable crypto transactions.


CHART OF THE WEEK

 

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