What are tax administrations doing to manage the crypto assets?

The Tax Administrations (TAs) apply various measures for a better management of the tokenized economy, also called Web3, which began after the financial crisis of 2008, when the Bitcoin Blockchain was introduced on October 31, 2008.

Therefore, the main objective of this article is to comment synthetically on some of these measures, first making a review of the main challenges for the TAs.

1. CHALLENGES FOR THE TAX ADMINISTRATIONS

The tokenization of assets is a process by which the value of a real-world asset (tangible or intangible) is digitalized and converted into a token represented on a blockchain.

There are multiple cryptographic tokens, with payment tokens being the most used, where cryptocurrencies are included.

There are also utility tokens that grant rights of use or access; security tokens (representing ownership shares in a company that does business using blockchain technology); asset tokens that represent an asset, within which we can include non-fungible tokens (NFTs), currently undergoing an amazing expansion within the art world; and hybrid tokens as a combination of the above.

Faced with this phenomenon, the states are trying to regulate these operations, first, to identify them to enhance them, but also to protect consumers and prevent criminal activity around their taxation within the current regulatory frameworks.

There is no uniform tax treatment in different countries, as the Organization for Economic Cooperation and Development (OECD) warns in its report “Taxing Virtual Currencies[1]”, where it says that the lack of comprehensive guidance or a framework for tax treatment, which is partly due to the complexity of defining the treatment applicable to these assets in a way that covers their different facets, as well as their complex and rapidly changing nature.

In addition, for countries in general and for TAs in particular, the following difficulties arise:

  • Absence of centralized control over crypto assets.
  • The pseudo-anonymity, with difficulties related to obtaining the information of the operations lie particularly in the identification of the corresponding intermediary, the notifiable event, the available reportable information, and the valuation of the assets.
  • The valuation difficulties that result from the high volatility, the lack of a uniform database and the -often-inadequate documentation.
  • Hybrid traits also, that is, difficulties in classifying a financial instrument or an intangible asset.
  • The rapid development of the underlying technology (blockchain).

Within these difficulties, the need to have the information of the operations is one of the most relevant today.

Today the big limitation for states is that they only have the power to require subjects residing in their jurisdictions to report operations with cryptoassets.

That is, they do not have the power to regulate information regimes that oblige non-resident virtual asset service providers to report such transactions.

That is why, from the OECD, an international exchange regime for operations with cryptoassets is being promoted.[2]

2. SOME MEASURES APPLIED BY THE TAX ADMINISTRATIONS

In the United States, the Internal Revenue Service (IRS) warns that, according to its legislation, operations with cryptoassets have tax consequences.

In addition, the frequently asked questions formed a special working group whose mission is to reduce tax evasion with cryptocurrencies. (Trained in cryptocurrency tracking and blockchain analysis company services).

They also send letters to taxpayers with transactions in virtual currency, who potentially do not report income or pay the tax resulting from transactions in virtual currency or do not report their transactions correctly.

In August 2022, the justice summoned the cryptocurrency exchange Sfox at the request of the IRS

Sfox has more than 175 thousand users, who made transactions for more than US$ 12 billion since 2015. The objective is that it reveals the identities of taxpayers who made transactions more than US $ 20,000 during the years 2016 to 2021.

These “the IRS already used John Doe” subpoenas to obtain information in cases of Circle, Coinbase and Kraken between 2018 and 2021.

In Spain, the AEAT in its annual fiscal and customs control plan 2022 highlights the sending of notices to taxpayers of operations with cryptoassets in the personal income tax.

The plan also highlights the regulatory development and preparation of declaration models to comply with the information obligations established by Law 11/2021. The first information is expected to be available in 2023 with respect to 2022.

In the 2021 revenue operation, the State Tax Administration Agency (AEAT) included a box in the tax return that says “the Tax Agency has information on operations conducted with virtual currencies. If you had conducted operations selling virtual currencies, remember that you must declare the capital gain or loss….”

In Argentina, there has been, since October 2019, an information regime where resident banks inform the Federal Administration of Public Revenues (AFIP) on a monthly basis the accounts with which each of the clients is identified, as well as the registrations, cancellations and modifications that occur and the total amounts expressed in Argentine pesos of the income, expenses and monthly final balance of the accounts.

With such information, AFIP recently notified 3997 people who traded cryptocurrencies in 2020 and did not declare them in personal property and earnings.

The AFIP is actively working on the detection of crypto mining rigs by cross-checking information on consumed electrical energy and imported equipment (customs). They conducted inspections in various provinces where they detected six establishments with more than 3,000 video boards.

Likewise, the AFIP has secured embargoes on digital assets belonging to debtors. As of June 2022, it was reported that courts throughout the country authorized 1269 embargoes for more than $800 million Argentine pesos.

In Brazil, there is also an information regime whereby exchanges are obliged to provide information on movements and balances of virtual currency holders in their accounts, thus equating to that of fiat money financial institutions in their role as information agents.

In Colombia, the Directorate of National Taxes and Customs (DIAN) reported this year that it conducts inspections of operations with cryptoassets, which seek to establish a tax control to the omitted or inaccurate taxpayers who in the Income and Complementary Taxes did not register the income obtained from operations with cryptocurrencies or registered them inaccurately.

In the UK, HMRC has a published guidance guide on cryptocurrency taxes for both individuals and companies and conducts various audits of the subject.

The Australian Taxation Office (ATO) of Australia has a detailed guide to taxation of cryptoassets where it also includes the taxation of NFTs with practical examples of various situations.

In Canada, the Canada Revenue Agency (CRA) to audit crypto assets, sends a 54-question survey to ask about a taxpayer’s business history (common CRA audit questions https://es.Scribd.Com/document/401254249/cracryptocurrency-audit-questions).

Among them, questions such as which exchange you used to purchase, providing the addresses of the cryptocurrencies you have transacted with, along with the dates you performed these particular “exchange” operations and a timeline of when you made each fiat currency purchase to crypto stand out.

Finally, in many countries, queries have been answered and tax criteria have been published regarding how various operations such as mining, staking, buying, and selling virtual currencies, NFTs, among others, are taxed. Just to mention some cases, we highlight those of Spain, Chile, Argentina, Colombia.[3]

 3. FINAL IDEAS

Tax administrations must work with the regulatory framework of their country and determine in each specific case if there are taxable events that are subject to taxation.

Likewise, they can and should propose regulatory changes to provide certainty to the issue, consumer protection and improve their control strategy.

They cannot remain inactive on this issue while waiting for possible multilateral solutions, where a consensus could be reached on how cryptoassets should be taxed.

It is recommended that each country should have a clear orientation and a legislative framework applicable to operations with cryptoassets.

To determine the taxation, it is key to know in depth the new business models of all cryptoassets, not only cryptocurrencies but NFTs, Decentralized Autonomous Organization (DAO), security token, utility token etc., for which public-private collaboration is very important, including the advice of experts and study centres in the field and for example the use of instruments such as sandboxes.

The OECD is a particularly good initiative to implement an international exchange regime for operations involving cryptoassets, since today one of the greatest difficulties is to have information on operations.

Preventive control actions are recommended, such as sending letters or making available to taxpayers the information available to the TAs.

It is vital that the TAs apply measures not only in relation to cryptocurrencies but also with other cryptographic tokens that have had a remarkable development such as NFTs, which allow multiple operations to be conducted hiding the identity of the parties thus facilitating tax fraud and money laundering operations.

Of course, it is also important to train officials on a permanent basis for in-depth knowledge of the subject and regarding new skills to use current data analysis and research techniques.

In short, in the face of global developments such as those we are experiencing, the path of cooperation, collaboration and multilateralism between states is more appropriate than taking unilateral measures.

That is why it is key to know the best practices of the TAs that have advanced in various aspects related to the management of cryptoassets.

[1] https://www.oecd.org/tax/tax-policy/taxing-virtual-currencies-an-overview-of-tax-treatments-and-emerging-tax-policy-issues.htm. The report was prepared and endorsed by the 137 members of the OECD/G20 BEPS Inclusive Framework, providing a comprehensive analysis of the approaches and gaps in the main types of taxes (income tax, VAT and property tax), in relation to more than 50 jurisdictions that participated in the study.
[2] To expand see Collosa Alfredo New regime for the international exchange of information on operations with cryptoassets – CIAT Blog 10/17/2022 https://www.ciat.org/nuevo-regimen-de-intercambio-internacional-de-informacion-de-operaciones-con-criptoactivos/
[3] To expand see Alfredo Collosa “The taxation of cryptoassets in Spain, Colombia, Chile and Argentina” Blockchain Observatory. https://observatorioblockchain.com/web3/la-fiscalidad-de-los-criptoactivos-en-espana-colombia-chile-y-argentina/

 

 

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2 comments

  1. banca banbajio Reply

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  2. Teknik Telekomunikasi Reply

    thanks for share about What are tax administrations doing to manage the crypto assets

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