Challenges that Cryptoasset Anonymity Creates for Tax Administration
Keywords:
Cryptoassets, Cryptocurrencies, Anonymity, Tax Administration, AMLD5, FATCAAbstract
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.
References
Ahmed, M. (2021). Cryptocurrency tax compliance in the European Union: Reality or mirage? European Taxation, 61(11). https://doi.org/10.59403/2hchvwm
Androulaki, E., Karame, G. O., Roeschlin, M., Scherer, T., & Capkun, S. (2013). Evaluating user privacy in Bitcoin. In A. R. Sadeghi (Ed.), Lecture notes in computer science: Vol.7859: Financial cryptography and data security, FC2013 (pp. 34–51). Springer. https://doi.org/10.1007/978-3-642-39884-1_4
Annunziata, F. (2020). Speak, if you can: What are you? An alternative approach to the qualification of tokens and initial coin offerings. European Company and Financial Law Review, 17(2), 129–154. https://doi.org/10.1515/ecfr-2020-0007
Bal, A. M. (2013). Stateless virtual money in the tax system. European Taxation, 53(7), 351–356.
Bal, A. (2014a). Should virtual currency be subject to income tax? SSRN. https://doi.org/10.2139/ssrn.2438451
Bal, A. M. (2014b). Taxation of virtual currency (Meijers-reeks) [Doctoral dissertation, University of Leiden]. Institutional Repository of the University of Leiden. https://hdl.handle.net/1887/29963
Bal, A. M. (2015). Bitcoin transactions: Recent tax developments and regulatory responses. Derivatives & Financial Instruments, 17(5), 1–10.
Bal, A. (2019). Developing a regulatory framework for the taxation of virtual currencies. Intertax, 47(2), 219–233. https://doi.org/10.54648/taxi2019019
Byrnes, W. H., & Munro, R. J. (2015). Money laundering, asset forfeiture and recovery, and compliance―A global study guide. Matthew Bender Elite Products.
Cumming, D. J., Johan, S., & Pant, A. (2019). Regulation of the crypto-economy: Managing risks, challenges, and regulatory uncertainty. Journal of Risk and Financial Management, 12(3), Article 126. https://doi.org/10.3390/jrfm12030126
Directive 2015/849. Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, amending Regulation (EU) No 648/2012 of the European Parliament and of the Council, and repealing Directive 2005/60/EC of the European Parliament and of the Council and Commission Directive 2006/70/EC. European Union. http://data.europa.eu/eli/dir/2015/849/oj
Directive 2018/843. Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018 amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, and amending Directives 2009/138/EC and 2013/36/EU. European Union. http://data.europa.eu/eli/dir/2018/843/oj
European Central Bank. (2015). Virtual currency schemes – A further analysis. European Central Bank. https://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemesen.pdf
European Commission. (n.d.). Tax fraud & evasion ― Strengthening rules on administrative cooperation and expanding the exchange of information: Have your say. European Commission. https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12632-Tax-fraud-evasion-strengthening-rules-on-administrative-cooperation-and-expanding-the-exchange-of-information_en
European Commission. (2021). Proposal for a directive of the European parliament and of the council on the mechanisms to be put in place by the member states for the prevention of the use of the financial system for the purposes of money laundering or terrorist financing and the repealing directive (EU) 2015/849, COM(2021) 423 final. European Commission. https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52021PC0423
European Commission. (2022). Council directive amending directive 2011/16/EU on administrative cooperation in the field of taxation, COM(2022) 707 final. European Commission. https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12632-Tax-fraud-evasion-strengthening-rules-on-administrative-cooperation-and-expanding-the-exchange-of-information_en
European Securities and Markets Authority. (2019). Advice: Initial coin offerings and crypto-assets. ESMA. https://www.esma.europa.eu/sites/default/files/library/esma50-157-1391_crypto_advice.pdf
European Union. (2006). Council directive 2006/112/EC of 28 November 2006 on the common system of value added tax. Official Journal of the European Union. https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32006L0112
Financial Action Task Force. (2014). Virtual currencies: Key definitions and potential AML/CFT risks. FATF. https://www.fatf-gafi.org/content/dam/fatf-gafi/reports/Virtual-currency-key-definitions-and-potential-aml-cft-risks.pdf
The Foreign Account Tax Compliance Act, 2010.
Grinberg, R. (2011). Bitcoin: An innovative alternative digital currency, Hastings Science & Technology Law Journal, 4(1), 160–208.
He, D., Habermeier, K., Lecklow, R., Haksar, V., Almeida, Y., Kashima, M., Kyriakos-Saad, N., Oura, H., Sedik, T. S., Stetsenko, N., & Verdugo-Yepes, C. (2016). Virtual currencies and beyond: Initial considerations (IMF staff discussion note SDN/16/03). International Monetary Fund. https://www.imf.org/external/pubs/ft/sdn/2016/sdn1603.pdf
Hellani, H., Samhat, A. E., Chamoun, M., Ghor, H. E., & Serhrouchni, A. (2018). On blockchain technology: Overview of Bitcoin and future insights. Proceedings of the 2018 IEEE International Multidisciplinary Conference on Engineering Technology (IMCET). IEEE. https://doi.org/10.1109/IMCET.2018.8603029
Herlin-Karnell, E., & Ryder, N. (2017). The robustness of EU financial crimes legislation: A critical review of the EU and UK anti-fraud and money laundering scheme. European Business Law Review, 28(4), 427–446. https://doi.org/10.54648/eulr2017023
Herrera-Joancomartí, J. (2014). Research and challenges on Bitcoin anonymity. In J. Garcia-Alfaro, J. Herrera-Joancomartí, E. Lupu, J. Posegga, A. Aldini, F, Martinelli, & N. Suri (Eds.), Lecture notes in computer science (including subseries Lecture notes in artificial intelligence and lecture notes in bioinformatics): Vol. 8872: Data privacy management, autonomous spontaneous security, and security assurance, 9th international workshop, DPM 2014, 7th international workshop, SETOP 2014, and 3rd international workshop, QASA 2014, Wroclaw, Poland, September 10-11, 2014: Revised selected papers (pp. 3–16). Springer. https://doi.org/10.1007/978-3-319-17016-9_1
Houben, R., & Snyers, A. (2018). Cryptocurrencies and blockchain: Legal context and implications for financial crime, money laundering and tax evasion. European Parliament. https://www.europarl.europa.eu/cmsdata/150761/TAX3%20Study%20on%20cryptocurrencies%20and%20blockchain.pdf
Houben, R., & Snyers, A. (2020). Cryptoassets: Key developments, regulatory concerns and responses. European Parliament. https://www.europarl.europa.eu/RegData/etudes/STUD/2020/648779/IPOL_STU(2020)648779_EN.pdf
Kaplanov, N. M. (2012). Nerdy money: Bitcoin, the private digital currency, and the case against its regulation. Loyola Consumer Law Review, 25(1), 111–174.
Koshy, P., Koshy, D., & McDaniel, P. (2014). An analysis of anonymity in Bitcoin using P2P network traffic. In N. Christin & R. Safavi-Naini (Eds.), Lecture notes in computer science: Vol. 8437: International conference on financial cryptography and data security, FC 2014 (pp. 469–485). Springer. https://doi.org/10.1007/978-3-662-45472-5_30
Langer, M. (2017, December 20). Taxation of cryptocurrencies in Europe. Crypto Research Report. https://cryptoresearch.report/crypto-research/taxation-cryptocurrencies-europe/
Lewis, R., McPartland, J., & Ranjan R. (2017). Blockchain and financial market innovation. Economic Perspectives, 41(7). https://www.chicagofed.org/publications/economic-perspectives/2017/7
Marian, O. (2013). Are cryptocurrencies super tax havens? Michigan Law Review First Impressions, 122, 38–48.
Nakamoto, S. (2008). Bitcoin: A peer-to-peer electronic cash system. SSRN. https:/doi.org/10.2139/ssrn.3440802
Natarajan, H., Krause, S., & Gradstein, H. (2017). Distributed ledger technology (DLT) and blockchain (FinTech Note, Note 1). International Bank for Reconstruction and Development/The World Bank. http://documents.worldbank.org/curated/en/177911513714062215/Distributed-Ledger-Technology-DLT-and-blockchain
Ober, M., Katzenbeisser, S., & Hamacher, K. (2013). Structure and anonymity of the Bitcoin transaction graph. Future Internet, 5(2), 237–250. https://doi.org/10.3390/fi5020237
Organisation for Economic Co-operation and Development. (2018). Tax challenges arising from digitalisation – Interim report 2018: Inclusive framework on BEPS (OECD/G20 base erosion and profit shifting project). OECD Publishing. https://doi.org/10.1787/9789264293083-en
Organisation for Economic Co-operation and Development. (2020). Taxing virtual currencies: An overview of tax treatments and emerging policy issues. OECD Publishing. https://www.oecd.org/tax/tax-policy/taxing-virtual-currencies-an-overview-of-tax-treatments-and-emerging-tax-policy-issues.pdf
Organisation for Economic Co-operation and Development. (2022). Crypto-asset reporting framework and amendments to the common reporting standard: Public consultation document: 22 March – 29 April 2022. OECD Publishing. https://web-archive.oecd.org/2022-03-22/627496-public-consultation-document-crypto-asset-reporting-framework-and-amendments-to-the-common-reporting-standard.pdf
Reid, F., & Harrigan, M. (2013). An analysis of anonymity in the Bitcoin system. In Y. Altshuer, Y. Elovici, A. B. Cremers, N. Aharony, & A. Pentland (Eds.), Security and privacy in social networks (pp. 197–223). Springer.
Snyers, A., & Pauwels, K. (2018). ICOs in Belgium: Down the rabbit hole into legal no man’s land? Part 1. International Company and Commercial Law Review, 29(8), 491–510.
Spagnuolo, M., Maggi, F., & Zanero, S. (2014). BitIodine: Extracting intelligence from the Bitcoin network. In N. Christin & R. Safavi-Naini (Eds.), Lecture notes in computer science: Vol. 8437: International conference on financial cryptography and data security, FC 2014 (pp. 457–468). Springer. https://doi.org/10.1007/978-3-662-45472-5_29
Valeriane, E. M. (2016). IRS, will you spare some change? Defining virtual currency for the FATCA. Valparaiso University Law Review, 50(3), 863-911.
Vandezande, N. (2018). Virtual currencies: A legal framework. Intersentia.
Witzig, P., & Salomon, V. (2018). Cutting out the middleman: A case study of blockchain-induced reconfigurations in the Swiss financial services industry (Working Paper 1, 2018/E, The circulation of wealth). Université de Neuchâtel. https://libra.unine.ch/bitstreams/d60c453b-3adf-498a-a91e-4b41ef9a282d/download
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2024 Sergio Avalos
This work is licensed under a Creative Commons Attribution 4.0 International License.
Our open access status means that authors retain the copyright of their work. However, all papers published in JOTA are done so under a Creative Commons Attribution 4.0 International license (CC BY). This means that others can share and/or adapt your work without your permission as long as they follow certain rules, including attributing your work correctly.
You can learn more about this on our Open Access, Licensing, and Copyright Policies page.
