Tax Compliance in the age of Cryptocurrencies

NTO Webinar

One of the primary manifestations of increased digitisation of national economies is the rise of non-state-backed digital assets, popularly called cryptocurrencies. These digital assets are tokens, blockchain-based, digital units of exchange that rely on cryptography. While it is undisputed that the technology that underpins these currencies are revolutionary, their inherent characteristics of decentralisation, (pseudo) anonymity of its users, global outreach, relative ease of use, and lack of deterrence provide positive incentives for tax non-compliance, illicit financial flows (IFFs), and financial crimes.

On 18 November 2022, the Network of Tax Organisations (NTO) hosted a webinar on “Understanding and Addressing Tax Compliance in the age of Cryptocurrencies”. The webinar featured presentations and perspectives from representatives from the Canadian Revenue Agency (CRA), the Internal Revenue Service (IRS) of the United States Federal Government, TRM Labs, and the Inter-American Center of Tax Administrations (CIAT). These presentations provided the participants with the administrative and technical implications of cryptocurrencies and digital assets for tax administrations. The webinar welcomed more than 300 participants worldwide. Mr Ivan Kantardjiski, from the Illicit Financial Flows (IFFs) sector program of the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ), moderated the webinar.

Owning to the nascent understanding of cryptocurrencies and digital assets, Mr Kantardjiski commenced the webinar by introducing the participants to an IMF-produced info-video on the fundamentals of cryptocurrencies. Two polls were conducted during the webinar. The first poll asked about the extent of tax administration’s readiness for the challenges posed by digital assets and cryptocurrencies. A large proportion of poll participants indicated that their tax administration is either completely unprepared or somewhat prepared for the challenges associated with the taxation of cryptocurrencies and digital assets. The second poll reiterated the enormity of the challenges of cryptocurrencies to tax administrators. The poll asked, “What would you say is the greatest challenge of tax authorities for incorporating cryptocurrencies and other digital assets in the national tax systems?’ The Majority of participants indicated that the insufficient legislation and guidance on digital assets is the greatest challenge for incorporating cryptocurrencies and other digital assets in their respective national tax systems. 

Mr Mike Lovell and Ms Jennifer Lane, both from the CRA, presented Canada’s experience as it tries to deal with the challenges of understanding and ensuring tax compliance of economic activities associated with digital assets and cryptocurrencies. Ms Lane commenced her presentation by lauding the webinar as a forum for exchange of knowledge and best practices. She remarked that given the global outreach of cryptocurrencies and digital assets, a global, collaborative approach is warranted for ensuring tax compliance. Echoing the results from the second poll, Mr Lovell stated that the lack of clear policy guidelines, the decentralised nature of the assets, its rapid fluidity, and the pseudo-anonymity of economic actors are primary obstacles that stifle compliance in Canada.

Further, Ms Lane expressed in her presentation that non-compliance equally stems from the lack of knowledge of the taxpayers. She argued that due to its complicated nature, owners of cryptocurrencies and digital assets are often unaware of the tax obligations associated with holding such assets.

Typical financial crimes associated with cryptocurrencies and digital assets in the Canadian jurisdiction include money laundering, non-compliance of tax obligations, crypto-market manipulation, and international scams. Mr Lovell indicated that it is impossible for a single agency to pursue financial crimes associated with cryptocurrencies and digital assets. Using money laundering as an example, he noted that a collaborative approach with agencies inside and outside of Canada’s jurisdiction has helped combat such financial crimes. In closing, the representatives from the CRA suggested that the use of data and tools for tracing and tackling would play a substantial role in ensuring compliance of tax obligations of cryptocurrencies and digital assets. Consequently, it is paramount that tax administrations enhance their capacity on data analytics and collaborate with partners inside and outside their respective jurisdictions.

The second speakers, Mr Tom Armstrong (TRM Labs) and Ms Trish Turner (IRS) presented how blockchain intelligence could help combat financial crimes. Mr Armstrong noted that the decentralised nature of blockchain assets, the fluidity of crypto-financial flows, and the lack of capacity present challenges to tax administrations. Hence, Blockchain Intelligence technologies provide an aggregated map of blockchain activities in a way that could help tax administrators navigate the convoluted space of cryptocurrencies and digital assets. Ms Turner’s presentation stressed the need to be proactive and the importance of strategic private and public partnerships, especially as it concerns tracing and tracking of cryptocurrency transactions. Echoing the sentiment made by CRA representatives, Ms Turner highlighted the importance of data analytics in determining what transactions are licit or illicit.

Mr Marcio Verdi provided inputs on the subject matter of tax compliance and cryptocurrency from the perspective of a regional tax organisation. He acknowledged the highly technical nature of digital assets and cryptocurrencies. Mr Verdi questioned about the readiness of tax administrations, especially those in developing countries in tackling the challenges associated with the burgeoning technologies. Nevertheless, he noted that collaboration between countries, development partners, and private entities in the IT sector would bolster the capacity of tax administrations in a way that could help them meet the tax compliance challenges of cryptocurrencies and digital assets.

The speakers’ presentations and the participants’ engagement show that cryptocurrencies and digital assets are pertinent to tax administrators. Moreso, the technical and fluid nature of digital assets and cryptocurrencies demands the enhancement of tax administrations’ technical capacity, especially in data analytics. Above all, the presentations and inputs from the speakers underline the necessity of close collaboration of tax administrations with public and private entities. As Mr Verdi remarked, tax administrations will struggle to fulfil their respective mandates without such collaboration.

The NTO extends its appreciation to the speakers and the participants in this webinar. The NTO, as a peer learning platform, will continue to bring together experts and stakeholders to discuss contemporary tax administration challenges. The NTO looks forward to welcoming all to its future webinars.