Abstract
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“The virtual currency market has grown significantly worldwide in the last decade. Innovations have made it necessary for the concept of cryptocurrencies to be broadened to include so-called “cryptoassets”. Countries differ in their legal frameworks for the taxation of cryptoassets and in how they address the challenges that cryptoassets create for tax administration. The pseudonymity of cryptoassets presents the biggest challenge when tax administrations are attempting to properly enforce tax compliance and counter tax evasion. This article provides an overview of the existing legislation addressing the pseudonymity of cryptoassets with an emphasis on the European Union (EU)’s Anti-Money Laundering Directive 5 (AMLD5) and the United States’ Foreign Account Tax Compliance Act (FATCA). It argues that both legislations have limitations in respect of their coverage of all stakeholders involved in the cryptoasset market, and provides insights into recent public consultations by the Organisation for Economic Development (OECD) and proposed legislation by the EU on the matter. Finally, it raises the question of whether or not a coordinated effort at the global level would be the best approach to take in order to address a problem that is common across tax administrations around the world: the pseudonymity of cryptoassets.”
The Growth and Challenges of Cryptocurrencies
The cryptocurrency market has grown rapidly over the past decade, and the legal framework for taxation and the challenges it poses for tax administrations vary from country to country. The (pseudo-)anonymity of cryptocurrencies presents a significant obstacle for tax authorities when trying to ensure proper enforcement of tax compliance and combat tax evasion.
Initiatives in the EU and the US
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“Countries have taken different regulatory approaches with respect to cryptocurrencies, both in the way in which they are classified (either as property, private money, or foreign currency) and in terms of the tax consequences of cryptocurrency transactions (how to determine the cost and value at the time of alienating, whether or not there are capital gains, whether or not they are within the scope of VAT, or whether or not they are tax exempt).
This undoubtedly creates tax planning opportunities as a result of hybrid mismatches within different jurisdictions, which can allow taxpayers to find schemes that allow them to avoid tax. On the other hand, until now, the approaches taken have depended on national legislation, which means that there is no consensus on how to solve the biggest problem that cryptocurrencies generate from a tax perspective: anonymity.
The different approaches taken by countries to regulate the anonymity of cryptocurrencies, together with initiatives such as those introduced by the United States through FATCA and the European Union through the AMLD5―regulations that, as previously discussed, leave key stakeholders out of the regulatory framework when it comes to covering the entire spectrum of the cryptocurrency market and bringing anonymity to transparency―added to the fact that the vast majority of countries lack regulations that seek to attack the anonymity of cryptocurrencies, generates a problem of great proportions which enables tax evasion.”
- EU Anti-Money Laundering Directive 5 (AMLD5):
The author points out that neither piece of legislation adequately addresses or includes all the key parties (stakeholders) involved in the cryptoasset market, such as investors, exchanges, brokers, regulators, or other entities participating in the ecosystem.
In other words, the laws in question are not comprehensive enough to regulate or oversee all aspects or participants in the market effectively.
- United States Foreign Account Tax Compliance Act (FATCA):
FATCA does not explicitly require cryptocurrency exchanges or wallet providers to report accounts of US persons, etc., which may hinder its effectiveness.。
Structure of the Paper
1. INTRODUCTION
1.1. The Problem
1.2. Prior Research into the Taxation of Cryptoassets
2. THE THEORETICAL FRAMEWORK OF BLOCKCHAIN AND CRYPTOASSETS
2.1. What is Blockchain?
2.2. The Definition and Origin of Cryptoassets
2.3. Why Do People Use Cryptoassets?
2.4. The Issue of Anonymity
2.5. Participants in the Cryptoasset Market
3. CRYPTOASSET REGULATION AND TAXATION
3.1. Cryptoasset Regulatory Framework
3.2. Cryptocurrency Anonymity
3.3. The European Union: AMLD5
3.4. Problems with the European Union’s AMLD5
3.5. United States: FATCA
3.6. Problems with the United States’ FATCA
3.7. Recent Public Consultations and Proposed Cryptoasset Legislation
4. DISCUSSION
5. CONCLUSIONS
Comment
This paper provides a valuable overview of the trends surrounding the OECD’s CARF(Crypto Asset Reporting Framework) and the EU’s DAC(Directive on Administrative Cooperation)8. However, it mainly emphasizes the importance of international cooperation in addressing the anonymity of cryptoassets, suggesting that individual country-level approaches may be less effective. It also notes that there is still room for debate regarding whether these international frameworks represent the optimal solution.
As the paper correctly highlights, the anonymity associated with cryptoassets creates significant challenges for tax authorities worldwide in ensuring proper taxation (and collection). While conducting research into the tax implications of crypto-asset transactions and providing guidance by tax authorities is crucial, it is equally important to continue promoting research into the specific challenges faced by tax authorities and the development of effective frameworks to address these issues.
As mentioned in the paper, addressing these challenges will require not only tax law solutions but also the coordination of regulations in other fields and active engagement through international frameworks.
Additionally, there are some other important aspects of tax enforcement related to cryptoassets that merit discussion. I hope to explore and clarify these points in a future paper.
