Summary: Since the launch of Bitcoin in 2009, over 10,000 cryptocurrencies have emerged, creating a complex landscape for international tax systems. These digital assets, while enabling pseudonymous transactions, pose significant challenges for tax authorities, especially in cross-border scenarios. As cryptocurrencies continue to grow, many countries have introduced varying tax regulations, but international consensus remains fragmented. The decentralized nature of cryptocurrencies, combined with their volatility and potential for misuse, such as tax evasion and criminal activities, complicates enforcement and compliance. For example, some countries, like El Salvador and the Central African Republic, have adopted Bitcoin as legal tender, while others express concerns about their lack of intrinsic value and role in illicit activities. The absence of clear international tax guidelines leaves room for tax avoidance strategies, including the use of tax havens. To mitigate these risks, experts advocate for the development of uniform international tax frameworks that address issues like jurisdiction, valuation, and the classification of cryptocurrencies as assets or currencies. A global approach could prevent tax leakage, ensure fairness, and provide clarity for taxpayers and authorities alike. The need for better regulatory practices is evident, as cryptocurrency transactions remain largely outside the reach of traditional financial oversight, necessitating international cooperation and transparency to curb abuses.
Page Contents
1. Introduction
Since Bitcoin, the first and largest cryptocurrency, debuted in 2009, there have been over 10,000 other cryptocurrency assets that can be used as payment instruments.[1] Tax systems yet finding it breathtaking catching up to them due to their rapid development and ability to provide pseudonymity.
It also encompasses the intricate network of virtual currencies that are prevalent in the world of the internet. Due to this intricate situation, citizens of one country may get income from overseas sources, giving both countries the right to impose taxes on that wealth and the authority to uphold their separate legal claims. This eventually results in a possible loss of revenue because a country might have to give up its ability to tax this revenue.[2] At the G20 summit, there was talk about the growing concerns about digital currencies and the market that follows.[3]
In respect to these novel requirements, a committee report that examined the digital currency market’s analysis—including its taxation—was published. But as things are right now, the world is dispersed, with every nation creating its own tax regulations concerning virtual currencies. As a result, there is still a significant vacuum in the field of international law, and in order to effectively address this shifting paradigm, it is necessary to develop it by creating coordinated and all-encompassing international tax frameworks.[4] A fair and effective system can be achieved by international cooperation and the creation of uniform norms, guaranteeing that tax duties are suitably addressed without placing an undue burden on any participating nation or resulting in revenue losses.
In this paper the author makes a case that a legal framework is essential in light of today’s obstacles to state-to-state international collaboration[5] and addresses how governments around the globe may deal with the new issues of taxing cryptocurrency assets while their use is still restricted in order to stop tax income from leaking and safeguard the integrity of the tax system.
i. Research Questions
- How do cryptocurrency’s decentralized and pseudonymous characteristics complicate tax compliance and enforcement?
- What potential future developments could impact the regulation and taxation of cryptocurrencies?
ii. Research Objectives
- To examine the specific challenges that tax authorities face in the context of cryptocurrency taxation.
- To identify best practices and key challenges in the regulatory approaches of different countries.
2. Analysis of Concerns Around Crypto Taxation
Diverse and fervent opinions exist regarding cryptocurrency assets. For some libertarians, the possibility of freeing financial transactions from governmental regulation and banking institution participation is a nirvana. The Central African Republic and El Salvador have even gone so far as to accept Bitcoin as legal tender.[6] However, others believe that cryptocurrency assets are not just intrinsically worthless but also a front for fraud, criminality, and gambling. They also highlight its startling instability. For example, Bitcoin shot up to almost $70,000 in 2021 from $200 a decade earlier and then dropped to about $29,000 today. Consumers’ fear has increased as a result of FTX’s collapse[7] and subsequent lawsuits filed by the US Securities and Exchange Commission against Binance and Coinbase[8]. Meanwhile, the appeal of criminal activity has been demonstrated by the high-profile seizures of billions of dollars. Lawmakers’ attention has been drawn to these changes more and more than ever, and there have been multiple calls for stringent regulations.
i. The Need to Tax Crypto
There are significant issues of fairness at play here. Even while it’s difficult to pinpoint exactly who owns cryptocurrency due to its pseudonymity, there are indications that ownership is largely concentrated among those with enormous wealth, despite the fact that possessing cryptocurrency is remarkably widespread among those with modest incomes as well. Surveys that are presently available show that roughly 10,000 persons own 25% of total Bitcoin.[9] The possibility for cryptocurrency transactions to be concealed from tax authorities is similar to that of cash transactions. At this point, a very small percentage of purchases are performed using cryptocurrency. However, extensive use may eventually result in widespread sales tax and VAT deceiving if tax systems remained ill-prepared, which would significantly reduce government revenue. This could be the largest risk posed by cryptocurrencies.
ii. The Need for International Framework
Section 115BBH of the Indian Income Tax Act stipulates that VDA’s are liable to a 30% capital gains tax rate at the time of transfer[10]. Nonetheless, the tax treatment of an individual who does not reside in India is not specifically addressed in this section. As such, it gives rise to concerns surrounding the taxation of income accrued while staying outside of India or whether the income source is located outside of India in accordance with the income tax act’s definition of accrual. The lack of clarity in this area necessitates a detailed assessment of the pertinent tax legislation and potential help from Indian tax authorities in order to determine the tax owing in such cases.Transactions using cryptocurrencies are transnational, thus raises unique tax challenges.
In a global digital marketplace, people can interact without actual money or traditional financial middlemen with the aid of cryptocurrencies. However, because cryptocurrencies are digital, it might be challenging to figure out how to handle them in terms of taxes, particularly for individuals who are impacted by the DTAA. Currently, there are no clear guidelines on how to tax transactions involving virtual digital assets provided by either international tax law or the DTAA treaties. This lack of transparency keeps tax authorities and taxpayers in the dark as they attempt to ascertain the tax responsibilities associated with these transactions. Individuals are compelled to look into alternate strategies, such as trading in tax havens, in an effort to lessen their tax liability due to this disparity in tax treatment. Regretfully, this circumstance has also led to widespread scams, as the FTX example illustrates. International collaboration, the creation of precise regulations, and practical steps to stop tax evasion and other fraudulent actions involving cryptocurrencies are all necessary to address this problem. It is imperative that efforts be made to create a transparent international tax system for cryptocurrencies. To guarantee uniformity and equity in the taxation of cryptocurrency earnings, countries can incorporate particular clauses into their international tax treaties and DTAA agreements.
iii. Crypto Classification
Regardless of the eventual boom or bust in cryptocurrency, a rational tax policy, we see, is required. How to categorize cryptocurrency assets—should they be treated as property or money—is a crucial question. Capital gains on the sale of cryptocurrency should be subject to the same taxes as conventional assets. Furthermore, sales and value-added taxes, or VAT, on cryptocurrency purchases ought to be comparable to those on cash transactions. It is imperative to make sure that these regulations are followed, which necessitates providing clarification on the tax classification of cryptocurrencies. In essence, these should be treated as assets for income tax purposes and as currencies for sales and VAT taxes. While this is challenging due to the dynamic nature of bitcoin asset exchanges, it is totally possible.
iv. Valuation and Jurisdiction Issues
There are two main issues with the taxation of crypto that need for guidelines on international taxation laws. First of all, when the DTAA is silent on the taxability of such revenue, it is not always clear which country has the jurisdiction to tax the money earned in transactions involving two countries. International tax legislation is required to make clear the allocation of taxing rights in cross-border virtual debt agreements (VDAs) because the pertinent jurisdictions are inherently conflicting. The second important consideration is the valuation technique for figuring out the taxable income that people make from crypto transactions. There is currently no standardized technique for assessing the taxable value of these transactions, making it difficult to determine their taxable value accurately.
v. Taking Up the Implementation
The “pseudonymous” character of the digital currency assets presents the biggest taxation issue. Stated simply, transactions employ public addresses that are very challenging to associate with specific people or businesses. This might facilitate tax evasion. Therefore, compliance is crucial for tax officials.
The problem can be fixed if transactions are made through centralized exchanges, as they may be governed by traditional “know your customer” tracking laws and possibly withholding taxes. Such regulations are being implemented in several nations in the hopes of increasing tax adherence.[11] Reporting requirements, however, can encourage people to use centralized exchanges overseas in order to avoid informing tax authorities. The Organization for Economic Co-operation and Development has created a framework for international information sharing about cryptocurrencies in order to allay those concerns.[12] Nevertheless, implementation is still a way off. The possibility that reporting laws (along with the shortcomings of some cryptocurrency intermediaries) could encourage people to transact more often through decentralized exchanges or peer-to-peer trades, where there is no central body in charge of overseeing these transactions, is more worrisome.[13] Getting beyond such is still quite difficult for tax administrators.
3. Suggested Legislative Frameworks and Best Practices
The source nation-based jurisdiction and the resident nation-based jurisdiction are the two main jurisdictions in the worldwide taxation framework. Most countries, including China and the United States of America, incorporate both ideas into their tax systems. Some jurisdictions, like Macau and Hong Kong, only use source countries-based jurisdiction, though.[14] These frameworks establish tax liabilities according to the investor’s residency or the source of their income. Notably, tax rights in the global economy have historically been governed by the notion of “Permanent Establishments” (PEs) in the source country.[15] But given how quickly the digital economy is growing, it is necessary to go beyond these limitations.
Treating crypto as individual income in the global market makes sense and is fair when taxed according to the source jurisdiction concept. Taxation on income should be the prerogative of the country from which it originates, regardless of the physical presence of the individual. This theory recognizes that the source of income is important when figuring out how much of it is taxed, regardless of the person’s residence. The notion of source jurisdiction also helps shield the country of origin from potential income losses. When revenue is transferred from one nation to another for use, the destination nation may apply indirect taxes, like value-added tax or sales tax, to the transferred revenue. [16]The country of origin would lose out on the chance to collect taxes on the first generation of income, nevertheless, if the source jurisdiction for direct taxation was ignored.
All things considered, implementing the source jurisdiction idea ensures a fair and acceptable strategy, preventing double taxation and enabling countries to appropriately tax income produced inside their boundaries. This approach promotes economic fairness, consistent revenue, and effective tax management in the ever-changing landscape of virtual currencies. Effective resolution of the cryptocurrency valuation issue can be achieved by tackling the jurisdictional issue.
The laws and regulations set forth by the country in question may serve as the basis for valuation when income is subject to taxation in the jurisdiction from which it originated. This method provides clarity and consistency in estimating the taxable value of digital currencies by ensuring that the valuation approach is in line with the taxation legislation of the charging jurisdiction. It becomes imperative to propose an amendment that particularly addresses the digital currency valuation method in the context of India. Indian authorities can create a defined process for valuing digital currencies for tax purposes by including a specific clause in the current tax legislation.
4. Conclusion
The tide has not yet shifted in the fight to properly integrate cryptocurrency into the larger tax system because of the complexity of the fundamental issues raised by pseudonymity, the speed at which innovation is happening, the enormous gaps in knowledge, and the uncertainties that lie ahead.
One of the main issues facing the world today is the unstable state of the crypto market, which is why every country is attempting to regulate it in a different manner. Some countries have openly banned the currency, while only a small number have made it legal tender. While it might be a clever way to turn a profit and move toward cashless transactions, there is a risk of fraud, money laundering, and other illicit activities like tax evasion. However, the difficulties are basic, and there may be more risks than most realize.
In order to address the problems with the current system, a thorough international tax framework on digital currencies is essential. Certain requirements are evident, including their classification for tax purposes being unambiguous. It is imperative that the opaque tax system be clarified by establishing equitable and open global standards.
[1] Cameron Dark, David Emery, June Ma and Clare Noone, ‘Cryptocurrency: Ten Years On’ (Reserve Bank of Australia, June 2019) https://www.rba.gov.au/publications/bulletin/2019/jun/cryptocurrency-ten-years-on.html accessed on 25 August 2024.
[2] Financial Action Task Force, ‘Virtual Currencies Key Definitions and Potential AML/CFT Risks’ (June 2014) https://www.fatf-gafi.org/media/fatf/documents/recommendations/Virtual-currencies-Key-definitions-and-potential-AML-CFT-risks.pdf accessed 25 August 2024.
[3] ‘PM Modi Calls for Crypto Regulation, Cyberspace Security and Human-Centric AI Governance’ (The Economic Times, 10 September 2023) https://economictimes.indiatimes.com/tech/technology/cryptocurrencynew-subject-for-social-order-monetary-financial-stability-pm-narendra-modi/articleshow/103551208.cms?from=mdr accessed 25 August 2024.
[4] Katherine Baer, Ruud de Mooij, Shafik Hebous and Michael Keen, ‘Crypto Poses Significant Tax Problems—and They Could Get Worse’ (IMF Blog, 5 July 2023) https://www.imf.org/en/Blogs/Articles/2023/07/05/crypto-poses-significant-tax-problems-and-they-could-get-worse accessed 25 August 2024.
[5] N.N. Emelianova and A.A. Dementyev, ‘Cryptocurrency, Taxation and International Law: Contemporary Aspects’ in E. Popkova and B. Sergi (eds), Artificial Intelligence: Anthropogenic Nature vs. Social Origin (Springer 2020) ISC Conference – Volgograd 2020, Advances in Intelligent Systems and Computing vol 1100 https://doi.org/10.1007/978-3-030-39319-9_80 accessed 25 August 2024.
[6] Fatima Alsancak, ‘Too Fast, Too Furious? Cryptocurrency as Legal Tender’ (The Royal United Services Institute for Defence and Security Studies, 4 December 2023) https://rusi.org/explore-our-research/publications/commentary/too-fast-too-furious-cryptocurrency-legal-tender accessed 27 August 2024.
[7] Kalley Huang, ‘Why Did FTX Collapse? Here’s What to Know’ (The New York Times, 10 November 2022) https://www.nytimes.com/2022/11/10/technology/ftx-binance-crypto-explained.html accessed 26 August 2024.
[8] Jinwan Cho, ‘Cryptocurrency under the Gavel: The Implications of SEC Lawsuits against Binance and Coinbase’ (Columbia Library Journals, Science and Technology Review, 3 March 2024) https://journals.library.columbia.edu/index.php/stlr/blog/view/598#:~:text=The%20Key%20Legal%20Issue%3A%20Are,clearing%20agency%2C%20among%20other%20charges accessed 26 August 2024.
[9] Michelle Faverio and Olivia Sidoti, ‘Majority of Americans Aren’t Confident in the Safety and Reliability of Cryptocurrency’ (Pew Research Centre) https://www.pewresearch.org/short-reads/2023/04/10/majority-of-americans-arent-confident-in-the-safety-and-reliability-of-cryptocurrency/ accessed 26 August 2024.
[10] Income Tax Act 1961 s 115BBH.
[11] Katherine Baer, Ruud A. de Mooij, Shafik Hebous and Michael Keen, Taxing Cryptocurrencies (International Monetary Fund, 2023) vol 2023, issue 144, ISBN 9798400246586, ISSN 1018-5941 https://doi.org/10.5089/9798400246586.001 accessed 27 August 2024.
[12] OECD, International Standards for Automatic Exchange of Information in Tax Matters: Crypto-Asset Reporting Framework and 2023 Update to the Common Reporting Standard (OECD Publishing 2023) https://doi.org/10.1787/896d79d1-en accessed 27 August 2024.
[13] Ian Shine, ‘Cryptocurrency Regulations Are Changing Across the Globe. Here’s What You Need to Know’ (World Economic Forum, 2 May 2024) https://www.weforum.org/agenda/2024/05/global-cryptocurrency-regulations-changing/ accessed 28 August 2024.
[14]International Commercial Tax (Cambridge University Press 2020) 61-148, DOI https://doi.org/10.1017/9781108774994.004 accessed 28 August 2024.
[15] OECD, Taxing Virtual Currencies: An Overview of Tax Treatments and Emerging Tax Policy Issues https://www.oecd.org/tax/tax-policy/flyer-taxing-virtual-currencies-an-overview-of-tax-treatments-and-emerging-tax-policy-issues.pdf accessed 28 August 2024.
[16] Vidushi Gupta, Yeesha Shriyan and Aashima Sawhney, Taxing Cryptocurrencies: The Concept, the Challenges, and the Required Changes (Vidhi Centre for Legal Policy, May 2022) https://vidhilegalpolicy.in/wp-content/uploads/2022/05/20220527_WP_Taxing-Cryptocurrencies_VCLP.pdf accessed 28 August 2024.
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