As the cryptocurrency market continues to grow, tax authorities worldwide face mounting challenges in ensuring compliance.
A recent study by Divly, a crypto-tax platform, reveals that a mere 0.53% of cryptocurrency investors globally declared their crypto activities to local tax authorities in 2022.
This article delves into the gravity of the situation, the potential consequences, and how authorities are taking steps to address this issue.
Uncovering the extent of crypto tax evasion
The research report showcases significant disparities in crypto tax compliance among various countries.
Finland has the highest rate at 4.09%, while the Philippines lags at a mere 0.03%. Only 1.62% of crypto investors in the US declared their assets, ranking 10th among the 24 countries analyzed.
Numerous factors contribute to the low tax payment rates for cryptocurrencies, including:
- Lack of public awareness: Lack of knowledge of reporting requirements varies across countries.
- Tax payment rate outside of cryptocurrencies: Global differences in tax compliance are not unique to cryptocurrencies.
- Government policies: Countries with well-defined tax reporting requirements tend to have higher compliance rates.
- Owning crypto does not always mean taxes are due: Most countries tax profits rather than ownership.
- The difficulty of calculating cryptocurrency taxes: Limited availability of reliable tax calculation tools for all countries.
The implications of widespread tax evasion
The pervasiveness of crypto tax evasion carries severe implications for both governments and investors.
Governments lose out on substantial revenue, which could be invested in public services and infrastructure. Additionally, the lack of regulation and accountability within the crypto market may encourage illegal activities such as money laundering and fraud.
The IRS criminal investigation division is preparing hundreds of cases concerning “off-ramping” and undeclared income received in cryptocurrency.
Over the past years, crypto tax evasion cases have risen to nearly half the cases investigated.
The IRS established the Office of Cyber and Forensic Services last year to manage the surge in cases, consolidating investigative units for cybercrime and digital assets.
The IRS Criminal Investigation division plans to hire over 500 employees to aid in crypto tax investigation efforts. The division will onboard 360 special agents and 150 additional workers within the next fiscal year.
Future of crypto tax compliance
As more countries introduce new regulations and bolster enforcement efforts, we can expect an increase in tax compliance in the coming years.
For instance, India recently released cryptocurrency tax regulations that should encourage more traders to declare their crypto assets.
Moreover, the European Union’s proposed changes to the Directive on Administrative Cooperation (DAC) would require cryptocurrency exchanges to share data with local governments.
As regulations evolve and enforcement measures strengthen, we can anticipate improved compliance rates.
It is crucial for cryptocurrency investors to prioritize declaring their assets and adhering to local tax regulations to avoid potential fines and penalties.