Tax Investigation and Enforcement Challenges for Crypto Assets: The Role of Blockchain Analysis and Profit and Loss Calculation, Part 2

II. Issues in Tax Enforcement Arising from Anonymity and Decentralization

1. Characteristics of Crypto Assets as “Super Tax Havens”

Marian identifies two fundamental characteristics of crypto assets that align with traditional tax havens:

However, in a more recent paper, Marian observes that the actual development of the crypto asset market has diverged from earlier expectations, concluding that crypto assets are not, and likely never will be, as functional as traditional tax havens⁴:
“[I]t has gradually become clear that cryptocurrencies do not, and probably cannot, function as tax havens any more successfully than traditional tax havens. As such, traditional tax enforcement mechanisms that rely on information reporting and tax withholding by intermediaries still work. Some legal tweaking may be required, but there is no need for fundamental changes in tax enforcement mechanisms.”

This conclusion appears to be based on the argument that, while blockchain technology theoretically has the potential to enable a system of pseudo-anonymity, decentralization, and intermediary-free financial transactions, the reality is that most of the crypto asset market is neither fully decentralized nor free from intermediaries. Moreover, it is not truly anonymous, as the transparency of blockchain technology allows for the identification of users through blockchain analysis and traditional financial intermediaries.

However, I hold a slightly different perspective.

The anonymity and decentralization of crypto assets are maintained to a certain extent due to technological advancements and the mutual reinforcement of these characteristics. Given ongoing technological progress, it cannot be ruled out that this situation may persist in the future.

Moreover, there remains a possibility that the international anti-tax evasion framework may not function effectively in certain cases. Additionally, the strengthening of regulatory measures—such as the Crypto-Asset Reporting Framework (CARF)—and enforcement mechanisms could drive taxpayers to jurisdictions beyond the reach of these regulations or toward new technologies and services designed to circumvent them.

That said, the focus of this paper is not on whether crypto assets constitute a “super tax haven”, but rather on the challenges posed by their anonymity and decentralization in tax enforcement. Accordingly, the discussion will proceed from this perspective.

2. Anonymity in Crypto Assets

Regarding the anonymity of crypto assets, it is widely recognized that they offer a certain degree of anonymity. This is because crypto assets are designed to enable transactions and ownership without requiring users to reveal their identities.

When trading crypto assets directly or seamlessly, wallets are typically used. A wallet is a tool—such as a software wallet, hardware wallet, or paper wallet—that stores private keys, signs transactions, and broadcasts them on the network.

Additionally, wallets provide an interface for accessing the blockchain, allowing users to check token balances and view transaction history.

A wallet that allows users to manage their own crypto assets without relying on third-party services for custody and protection, while also enabling them to control their private keys for signing and creating transactions, is called a private wallet (also known as a non-custodial wallet or unhosted wallet). In this article, the term “wallet” primarily refers to this type of private wallet, assuming it is provided by an overseas business and can be used without requiring user identity verification.

A “transaction” refers to an action that transfers crypto assets on the blockchain or executes smart contract operations, which will be explained later. In this article, the term “transaction” is used as a distinct concept, separate from the underlying dealings related to the transfer of crypto assets. In other words, “transaction” specifically refers to on-chain actions and is distinct from off-chain financial dealings, such as exchange trading, lending, and borrowing, which take place outside the blockchain.

When you create a wallet, a private key is randomly generated, and a corresponding public key is derived using an encryption algorithm. From this public key, an address is created—an alphanumeric string used to send and receive crypto assets and identify accounts on the blockchain.

The private key is a randomly generated alphanumeric string that allows users to manage the crypto assets associated with a specific address on the blockchain. It functions like a password.

If you lose your private key, you will no longer be able to access your crypto assets. If it is stolen, the assets stored in your wallet may be taken.

Private keys are used to sign transactions and access the crypto assets you own. They may also serve as proof that you are the legitimate holder or possessor of those assets.

On the other hand, because information encrypted with a public key can only be decrypted by someone with the corresponding private key, public keys are used to generate addresses and verify transactions.

When a user transfers crypto assets, data related to the sender’s address, the recipient’s address, and the amount of crypto assets to be sent is broadcast over the network. This broadcasted data is digitally signed with the user’s private key. Using the corresponding public key, the system verifies that the signature is from the legitimate private key holder, that there is a sufficient balance, and that the same nonce—a unique number used once per transaction—has not already been used.
These verification steps help prevent double spending and ensure that transactions are not duplicated.

Crypto assets are generally operated in a decentralized manner, and the verification process described above is performed by nodes. Nodes are the fundamental components of blockchain networks. They are devices running software that facilitates transaction sharing, data storage, and block verification. However, some nodes do not participate in block verification.

New crypto assets are issued through this verification process. Unlike traditional financial systems, crypto assets are not directly managed by a centralized authority, such as a government or financial institution that conducts identity verification. Instead, their issuance occurs automatically according to the protocol.

For this reason, crypto assets are considered decentralized. This decentralization serves as the foundation for enabling anonymous transactions and reinforces the anonymity associated with crypto assets.

On the other hand, the anonymity of crypto assets allows users to participate in the network without concerns about privacy violations or the risk of being tracked. It also reduces the likelihood of specific users being excluded from participation for any reason. This enhances the decentralization of the network, strengthening both its robustness and censorship resistance. In this way, the anonymity and decentralization of crypto assets are closely interrelated.

When generating a wallet or transferring crypto assets, users do not provide identity-related information or identification documents to the blockchain or any other system. Private keys, public keys, and addresses are also not directly linked to such information. Although crypto asset transactions are publicly recorded on the blockchain, they are associated only with a wallet address—a string of alphanumeric characters—rather than with the identity of the person executing the transaction.
For this reason, crypto assets are considered pseudonymous rather than fully anonymous.

As described above, the anonymity of crypto assets is based on several factors: users do not need to provide identity-related information when using crypto assets, such information is not connected to private keys or public keys, and user data is not recorded on the blockchain. However, this anonymity is not absolute but relative.

Users publish identifiers that are not directly linked to their identity, such as public keys and addresses. This allows third parties to trace transactions associated with specific addresses, meaning that transactions are effectively pseudonymous rather than fully anonymous. This characteristic is referred to as the pseudonymity of crypto assets.

In addition, because the information recorded on the blockchain is generally public and can be traced by anyone (traceability and transparency of crypto assets), a wallet holder’s identity may potentially be uncovered. This can occur when on-chain information is linked to off-chain information, particularly identity-related information held by centralized exchanges and merchants.

Thus, while traceability and transparency are distinct from anonymity, when combined with pseudonymity, they create the potential for breaching users’ anonymity and revealing their identities (see blockchain analysis in Section III below).

３．Tax Enforcement Challenges Arising from Anonymity

The anonymity of crypto assets, as described above, presents several challenges for tax enforcement:

In such cases, tax authorities may be unable to ascertain whether the parties involved in crypto asset transactions are subject to taxation in their jurisdiction. Furthermore, even if tax liability exists, determining the amount of gain or loss becomes significantly more complex.

Tax authorities may also face challenges in determining the actual use of crypto assets and ensuring tax compliance among residents of their jurisdiction. While the extent to which individual users can be identified remains an open question, research suggests that, at least in the case of Bitcoin, it is possible to trace IP addresses and associate them with geographic locations⁵.

Moreover, these challenges may lead to taxpayers failing to properly report their income from crypto asset transactions, as such transactions may escape detection by tax authorities. This, in turn, could result in income going untaxed in any jurisdiction. Additionally, some argue that these limitations impede tax authorities’ ability to track and analyze tax avoidance schemes, potentially fostering both tax evasion and aggressive tax avoidance strategies⁶.

The good news for tax authorities is that, contrary to the original vision of crypto assets—enabling financial transactions without government oversight or centralized institutions—centralized entities now play a dominant role in crypto asset trading⁷. These institutions can serve as key intermediaries in collecting user information and providing it to tax authorities.

In short, while the underlying mechanism of crypto assets ensures anonymity, many users trade or hold them through CEXs that require identity verification procedures (KYC: Know Your Customer). Through these procedures, users are required to submit identification and verify personal details such as their name and address. As a result, many users do not fully benefit from the anonymity that crypto assets theoretically offer.

What motivates users to transact through CEXs despite stringent requirements?

Possible reasons include the ease of access to CEX services, a user-friendly interface, a lack of interest in anonymity, a preference to avoid personal responsibility for security, and a desire to prevent transaction history from being easily tracked by others⁸. Moreover, since DEXs typically do not support direct crypto-to-fiat conversions, CEXs remain the more practical choice for users looking to exchange between the two.

Conversely, some users actively employ tools to enhance the anonymity of crypto assets, even when not necessarily intending to evade taxes⁹. These tools include:

Privacy coins¹⁰ – Crypto assets designed to obscure transaction details.
Mixers and tumblers¹¹ – Services that blend transactions from multiple users, making it difficult to trace the origin of funds.
Chain hopping – The repeated exchange of different crypto assets across multiple blockchains to obscure transaction trails.

Initially, criminals believed they could safely use Bitcoin for illicit transactions. However, as law enforcement agencies successfully leveraged blockchain analysis to investigate crimes, it became evident that Bitcoin is neither fully anonymous nor untraceable. Consequently, criminals have increasingly turned to anonymity-enhancing services to evade detection¹².

That said, most ordinary users are not particularly concerned with anonymity and therefore do not utilize such services.

４. Decentralization of crypto assets

As mentioned earlier, Marian, who highlighted the potential of crypto assets as a “super tax haven,” emphasized their lack of intermediary financial institutions. This characteristic can be described as the decentralized nature of crypto assets, meaning they are not controlled or managed by a central authority.

More specifically, in the context of crypto assets, decentralization extends beyond financial transactions; it also encompasses network structure, record management, governance, and decision-making processes. These decentralized elements collectively contribute to an ecosystem that operates independently of traditional financial institutions and other intermediaries

A distributed ledger is a data structure spread across multiple nodes, with its integrity maintained through distributed ledger technology (DLT), which records information in a decentralized manner. Using DLT, nodes can propose, verify, and record consistent state changes or updates across the entire network without relying on a centralized authority for data reliability.

Fundamentally, a distributed ledger operates through a consensus mechanism, where nodes approve the addition of new data based on an agreed-upon process. Once validated, the data is immediately synchronized across nodes worldwide, ensuring consistency and security. The network functions in a peer-to-peer manner, eliminating the need for central control. Its operation—and, in some cases, decision-making—is governed by pre-determined protocols and consensus mechanisms, distributing both authority and data across multiple nodes within the system.

Such distributed ledgers offer several advantages, including eliminating single points of failure, enhancing tamper resistance, and improving transparency. Additionally, they facilitate post-verification processes by making executed transactions and programs publicly accessible, thereby ensuring the traceability and transparency of crypto assets¹³.

As mentioned earlier, various centralized institutions that collect user information have become key players in crypto asset transactions. At the same time, a countertrend has emerged, strengthening the decentralized nature of crypto assets—most notably with the rise of Decentralized Finance (DeFi), which enables a peer-to-peer financial system that operates independently of central intermediaries.

Some users manage their crypto assets through DeFi, a broad term referring to financial systems and applications that operate without a centralized administrator, such as banks, securities firms, or CEXs. DeFi is often contrasted with Centralized Finance (CeFi), which relies on financial institutions and other entities as central administrators, and Traditional Finance (TradFi), which encompasses conventional financial markets.

Blockchain-based decentralized financial systems—one of the key applications of DLT—enable peer-to-peer financial transactions, reducing or eliminating the need for intermediaries and centralized processes. DeFi services, which are built on smart contracts deployed on public or permissionless blockchains, allow anyone to participate freely without requiring prior authorization.

Depending on the distributed ledger, smart contracts may be used to automatically execute processes when certain conditions are met. In general, a smart contract is a mechanism that registers a program on a blockchain, executes it automatically when predefined conditions are met, and records the results on the blockchain¹⁴. It is often described as a system that enforces contracts through automation; however, in cases where no legally binding agreement exists between the parties outside of the smart contract, the term “enforcing the contract” may not be entirely accurate.

Unlike traditional financial transactions, where individuals or corporations authorize transfers through intermediaries, smart contracts operate as open-source programs that execute transactions automatically. This allows users to verify in advance that the contract will only perform predefined processes, eliminating the need for third-party oversight and reducing intermediary risks.

Smart contracts manage contract terms, transaction history, and ownership records, ensuring that contractual obligations are executed automatically and recorded on the blockchain. Along with distributed ledgers (blockchains), smart contracts serve as a key technological component that supports the decentralized and administrator-free structure of DeFi¹⁵.

5. Tax Enforcement Issues Arising from the Decentralized Nature of Crypto Assets

The decentralized nature of crypto assets poses significant challenges for tax authorities. In particular, it disrupts traditional mechanisms for obtaining taxpayer information, which typically depend on centralized entities or withholding agents to facilitate accurate tax reporting and collection. This paper focuses on the former issue—specifically, the potential collapse of the existing framework in which tax authorities obtain information through financial institutions and other entities with withholding or reporting obligations. In a decentralized financial system, this framework risks becoming ineffective, raising serious concerns about how authorities can access the data necessary to ensure tax compliance.

In the traditional financial system, intermediaries—primarily financial institutions—serve a dual function¹⁶. First, they act as information holders, providing tax authorities in the recipient’s country of residence with relevant financial information under frameworks such as the Automatic Exchange of Information (AEOI) and the Common Reporting Standard (CRS). Second, they operate as withholding agents responsible for collecting taxes at source in the country where the income originates. This withholding obligation may arise either because the intermediary itself is the payor of the income or because it has been designated as a third-party withholding agent. In either case, the intermediary is required to withhold the appropriate amount of tax in accordance with the payor’s jurisdictional tax laws and any applicable tax treaties.

However, in the DeFi ecosystem, there are no traditional intermediaries responsible for matching parties to a transaction; instead, much of the intermediary function is performed algorithmically through smart contracts. As a result, there may be no identifiable entity capable of fulfilling these roles, or such entities may be difficult to identify. Furthermore, the absence of a clear legal jurisdiction often complicates matters, making effective and consistent tax enforcement infeasible.

In addition, while the crypto asset system inherently offers a degree of anonymity, peer-to-peer networks do not readily facilitate transactions among a broad and unidentifiable user base, and liquidity often remains a concern. As a result, there is increasing demand for services that serve as intermediaries and facilitate smoother transactions. However, when such services are provided by centralized entities that collect user information in compliance with identity verification requirements, as well as anti-money laundering and counter-terrorism financing regulations, the anonymity traditionally associated with crypto assets is significantly diminished.

On the other hand, DEXs, which form the core of DeFi, facilitate transactions between users through smart contracts, thereby offering mechanisms and services without relying on traditional intermediaries. Typically, DEXs do not collect identifying information about their users. That said, it is common for developers or teams to be involved in the creation and maintenance of DEX platforms, and in that sense, DEXs can be seen as providing intermediary-like services. However, the key distinction lies in the design: these services are generally intended to function without custodial control over users’ crypto assets or the involvement of a legal person who could bear rights and obligations under conventional legal frameworks.

Looking back at the tax system as it has developed to date—not only within the financial sector—tax authorities have traditionally relied on various centralized institutions, including private companies, financial institutions, and national and local government agencies. These entities have been expected to serve as information holders and withholding agents, thereby playing a crucial role in securing taxpayer compliance. However, decentralized systems have the potential to disrupt this structure by removing the institutional anchors on which tax authorities depend¹⁷. In a fully decentralized environment—where there is not only no entity performing intermediary functions, but also no party that tax authorities can depend on or hold accountable—the foundations of the existing tax system may no longer be viable. As such, a fundamental re-evaluation of the current framework may be required.

In a separate article¹⁸, the author examined the tax challenges posed by a decentralized digital society—particularly in contexts where no centralized institution exists to assume rights, obligations, or tax liabilities in transactions, and where trustless, anonymous exchanges take place on a global scale. That analysis also explored the tax implications of blockchain technology and smart contracts, which underpin such systems and have attracted growing interest in the field of taxation. By contrast, the present paper focuses on enforcement issues in the taxation of crypto assets, with particular emphasis on the practical difficulties encountered during tax audits and in the selection of audit targets.

６. CARF and Its Limitations

The OECD is also working to address the challenges posed by the rise of crypto assets. As mentioned above, crypto assets can be transferred and stored without relying on traditional intermediaries, which makes it difficult for tax authorities to fully trace transactions or determine where and how these assets are held. This lack of transparency hinders the ability of tax administrations to identify taxable events occurring within their jurisdiction and to verify whether related tax obligations are being met. As a result, the effectiveness of global tax transparency efforts achieved through the CRS (Common Reporting Standard) is at risk. Furthermore, the ability of individuals to hold cryptocurrencies in private wallets and transfer them across borders introduces additional risks, including the potential for illegal activity and tax evasion¹⁹.

To address these challenges, the OECD developed the Crypto-Asset Reporting Framework (CARF), a global initiative aimed at strengthening tax transparency. Introduced between 2022 and 2023, CARF facilitates the automatic exchange of tax information on crypto-asset transactions in a standardized format with the taxpayer’s jurisdiction of residence. The information subject to exchange includes the user’s name, address, jurisdiction of residence, taxpayer identification number, and date and place of birth.

Although CARF does not include information on crypto-asset balances, it mandates the reporting of the type of crypto-assets involved, their full names, aggregate amounts, aggregate fair market values, total number of units, and the number of transactions. These transactions may include purchases or sales for fiat currency, exchanges, receipts, and transfers—specifically those that are categorized by type (such as airdrops, staking, and lending), to the extent they are recognized by the relevant Reporting Crypto-Asset Service Providers (RCASPs), as discussed below.²⁰

Information exchange under CARF is scheduled to begin in 2027. In Japan, a reporting system aligned with CARF—covering the automatic exchange of information on cryptocurrency transactions involving non-residents—was introduced as part of the 2024 tax reform. This “Japanese version of CARF” is scheduled to take effect in 2026, based on provisions such as Article 10-9 of the Act on Special Provisions for the Enforcement of Tax Treaties.

The CARF framework shares similarities with the CRS in that it assumes a centralized entity as the information provider and imposes obligations on that entity to collect customer and transaction data and report it to tax authorities. However, CARF is distinct in that the entities subject to these obligations are cryptocurrency service providers, who generally lack experience with automatic information exchange systems.²¹

Since many cryptocurrency users trade and hold assets through CEXs, CARF is expected to be effective in enhancing tax enforcement. Moreover, as noted in section 3 above, if users are not particularly concerned about maintaining anonymity from tax authorities, it is unlikely that there will be a widespread shift to offshore CEXs or DEXs that do not perform identity verification, simply to avoid CARF compliance.

Footnotes

1. Omri Y. Marian, Are Cryptocurrencies ‘Super’ Tax Havens?, 112 MICH. L. REV. FIRST IMPRESSIONS 38, 42 (2013). ↩︎
2. Id. ↩︎
3. Id. ↩︎
4. Omri Y. Marian, Not ‘Super Tax Havens’ After All, UC IRVINE SCH. OF L. RSCH. PAPER No. 2025-01, forthcoming in INTERNATIONAL ISSUES IN THE TAXATION OF CRYPTOASSETS (Editora Revista dos Tribunais, 2025), at 7. ↩︎
5. Andreas Thiemann, Cryptocurrencies: An Empirical View from a Tax Perspective, 9 J. TAX ADMIN. 88, 91, 93-94 (2024). ↩︎
6. Vincent Ooi, Report on the Challenges Which Digital Assets Pose for Tax Systems with a Special Focus on Developing Countries, prepared for the United Nations Committee of Experts on International Cooperation in Tax Matters (26th Session), commissioned by the International Tax and Development Cooperation Branch, Financing for Sustainable Development Office, United Nations Department of Economic and Social Affairs (Mar. 7, 2023), at 26, https://financing.desa.un.org/sites/default/files/2023-03/Report%20Challenges%20of%20Digital%20Assets%20for%20Tax%20Systems.pdf. ↩︎
7. See Katherine Baer et al., TAXING CRYPTOCURRENCIES, 39 OXFORD REV. ECON. POL’Y 478, 491 (2023). For an overview of the paper, see Masui Yoshihiro, “Baer et al. (2023) Taxing Cryptocurrencies,” J-TaxNotes Blog (November 20, 2024),https://ymastax.blogspot.com/2024/11/baer-et-al-2023-taxing-cryptocurrencies.html. ↩︎
8. For example, if you provide your wallet address to a business partner or another party that knows your identity for the purpose of settling a transaction, there is a possibility that they could trace the transaction history on the blockchain and identify other transactions linked to that address. On the other hand, when using a CEX, transactions within the platform are not directly recorded on the blockchain, making it difficult to track them externally. However, CEXs manage this information internally and may provide it to tax authorities and law enforcement agencies in accordance with regulatory requirements.
   For reference, see Awa Sun Yin, How Centralized Exchanges Became the Most Common Crypto Mixers, NASDAQ (Oct. 23, 2023, 11:18 AM), https://www.nasdaq.com/articles/how-centralized-exchanges-became-the-most-common-crypto-mixers. ↩︎
9. See Nathan J. Richman, Practitioners See No Rush to Add Cryptocurrency to Badges of Fraud, 160 TAX NOTES Fed. 1327, 1329 (2018). ↩︎
10. With regard to privacy coins, many CEXs have discontinued their support for these assets in accordance with regulatory guidance. See EUROPOL, CRYPTOCURRENCIES: TRACING THE EVOLUTION OF CRIMINAL FINANCES 7 (2023). Additionally, some argue that privacy coins do not pose significant challenges to tax enforcement, given their limited circulation, their frequent use for speculative purposes, the fact that users do not always utilize their privacy features, and the lack of guaranteed long-term privacy protection.See Marian, supra note (4), at 22-23. ↩︎
11. See United States v. Elmaani, No. 20 Cr. 661 (CM), 2023 U.S. Dist. LEXIS 59357 (S.D.N.Y. Apr. 4, 2023), for a case involving tax evasion through the use of a mixer to conceal ICO-related profits. ↩︎
12. EUROPOL, supra note (10), at 19. ↩︎
13. Digital & Decentralized Finance Study Group, Interim Report 2-3(2021). ↩︎
14. Masashi Hojo & Junichiro Hatogai, Decentralized Finance in Crypto Assets: The Emergence of Autonomous Financial Services and the Search for Governance, Bank of Japan Rev. No. 21-J-3, at 1, 8 & n.2 (2021). ↩︎
15. Eiji Taniguchi, DeFi’s Expansion and the Financial Risks Identified, Research Focus No. 2022-009, at 3 (2022). ↩︎
16. See Bob Michel & Tatiana Falcão, OECD (2022) Public Consultation on the Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard: Comments by B. Michel and T. Falcão 9(2022), http://dx.doi.org/10.2139/ssrn.4266327. ↩︎
17. See Sergio Avalos, Challenges That Cryptoasset Anonymity Creates for Tax Administrations, 9 J. TAX ADMIN. 66, 67 (2024). ↩︎
18. Junya lzumi, Defi Tax Treatment of the Transfer of Cryptocurrencies and Other Tokens：Decentralized Digital Society Using Blockchain and Smart Contracts, 589 Zeihougaku 159 (2023). ↩︎
19. See OECD, PUBLIC CONSULTATION DOCUMENT: CRYPTO-ASSET REPORTING FRAMEWORK AND AMENDMENTS TO THE COMMON REPORTING STANDARD 4-5(2022); OECD, INTERNATIONAL STANDARDS FOR AUTOMATIC EXCHANGE OF INFORMATION IN TAX MATTERS: CRYPTO-ASSET REPORTING FRAMEWORK AND 2023 UPDATE TO THE COMMON REPORTING STANDARD 11-12(2023). ↩︎
20. OECD, PUBLIC CONSULTATION DOCUMENT, supra note (19), at 4-5; OECD, INTERNATIONAL STANDARDS supra note (19), at 11-12, 14, 18-19, 34-35. ↩︎
21. This is why CARF has been referred to as “Old Tricks for New Dogs“.See Paul Foster Millen & Peter A. Cotorceanu, Old Tricks for New Dogs: The OECD’s Cryptoasset Reporting Framework, 112 TAX NOTES INT’L 345, 345 (2023). ↩︎