From the U.S. to the U.K. and Kenya, governments worldwide are looking at solutions to introduce crypto taxes and avoid tax evasion. We look at some of the solutions that could help crypto taxation simpler and how centralized exchanges such as Binance are pushing the industry to be more tax compliant.
The introduction of crypto taxation laws has been a recurring theme across jurisdictions worldwide, with the blockchain space showing the potential of raising billions of dollars for these countries. Crypto taxation proponents argue that well-implemented crypto tax regulations could help push for mass adoption of digital assets worldwide – building trust amongst regulators and individuals alike. Opponents feel taxing cryptocurrencies would go against the decentralization and anonymity ethos of blockchain technology – as centralization is needed to report taxes correctly.
The wild growth of the crypto industry – topping $3 trillion in less than 14 years – makes it difficult for regulators to turn a blind eye to the market, given the billions lost in taxes every year. As such, several governments are increasingly implementing solutions to ensure tax collection from crypto investors.
The 2021 Infrastructure Investments and Jobs Act introduced new tax reporting standards for crypto brokers in the U.S. – set to go into effect in 2025 for the 2026 season. These rules are the latest step by the U.S. Treasury Department to tighten tax reporting on the crypto industry to generate nearly $28 billion in tax revenue from the industry by 2030. Under these new tax regulations, crypto brokers, exchanges, and payment processors will follow the same reporting regulations as traditional financial brokers.
In July 2023, Kenyan tax regulators introduced a 3% digital asset tax on all cryptocurrency transactions to help the crippling East African economy reach its $21 billion tax collection goals for 2023-2024. Other nations, such as Switzerland, UAE, Portugal, and Germany, impose a 0% tax on crypto for individuals – aiming to drive innovation in the blockchain space.
Despite the decentralized and pseudonymous nature of cryptocurrencies, taxation must be implemented to drive mass adoption of these digital assets while bringing regulators worldwide to the fold.
The headache in crypto tax compliance
The fractured nature of crypto taxation across different jurisdictions poses a challenge to taxing cryptocurrencies. Moreover, the pseudonymous nature of crypto poses a fundamental challenge to taxation. This means transactions use public addresses that are extremely difficult to link with individuals or firms. This can make tax evasion easier.
Governments can easily address this by coercing centralized exchanges to provide details via the standard “know your customer” tracking rules and possibly withholding taxes. However, tax reporting obligations could be easily avoided by crypto users who may select to use centralized exchanges abroad that do not follow the tax reporting obligation by their governments.
Even more troubling is that tough reporting rules and obligations could induce crypto users to transact increasingly via decentralized exchanges (DEXs) or peer-to-peer platforms. As there is no centralized collection of tax obligations, regulators find it difficult to collect taxes from these decentralized platforms.
What needs to be done to ensure crypto tax compliance
- Tax regulators setting up clear rules
One of the most important steps to crypto taxation is the implementation of clear rules on how cryptocurrencies can be taxed. Crypto taxation standards differ from country to country, which makes it difficult for governments to tax these global digital assets correctly. Implementing a standard global standard could help improve the global taxation of crypto.
Additionally, jurisdictions should have a standard classification of crypto as either property or cash. Various countries categorize cryptocurrencies as property, exposing them to capital gains taxes when users sell or trade the assets. In others, they are regarded as a currency, potentially liable to income tax.
- Introducing crypto tax-friendly tools of centralized exchanges
Another challenge for crypto tax collection is the lack of crypto reporting tools. Most people have problems reporting their regular taxes, and crypto could pose a similar challenge. Luckily, centralized exchanges are increasingly making it easier for customers to report their taxes.
For instance, Binance, the world’s largest crypto exchange in trade volumes, introduced its Binance Tax reporting tool to help users with crypto tax reporting, depending on their tax jurisdiction. The tool, launched in Canada and France, supports up to 100,000 transactions on the Binance platform. In the future, the tool aims to add other jurisdictions and will allow customers to import transactions from other wallets and blockchains into Binance Tax.
- Setting up a fair tax regime
Finally, governments must set fair taxes on these digital assets to entice users to pay their taxes. A blanket ban on crypto or extraordinarily high taxes (circa Kenya crypto tax laws) could push users to find ways to evade taxes, such as using DEXs or P2P platforms.
Setting up a fair crypto tax regime should involve consultations with the users to ensure the taxes are implemented correctly without exploiting the users or taxing their losses etc. The volatility of crypto values should be accounted for in the tax obligations.
