Examining the issues of the virtual currency tax system
The International Monetary Fund (IMF) released a report on the 5th on the tax problems caused by crypto assets (virtual currencies).
The IMF says there needs to be a consistent taxation of cryptocurrencies, regardless of whether they go viral or fail in the future.
A particularly important issue is to tax capital gains, which are the gains on the sale of owned assets, in the same manner as other assets, and to treat the purchase of goods and services with virtual currency in the same manner as cash transactions. He continued that it was necessary to impose sales taxes and such.
To that end, it is necessary to clarify the classification of virtual currencies as assets subject to sales tax, income tax, etc.
One of the current problems, the report said, is that cryptocurrency transactions, like cash transactions, can be hidden from tax authorities. Currently, the percentage of transactions made in virtual currency is small, but if the tax system becomes widespread without a tax system in place, there is a possibility that someday the avoidance of sales tax will become large.
He also pointed out that the anonymity provided by cryptocurrencies could facilitate tax evasion.
In particular, he sees a potential increase in trading on foreign exchanges and decentralized exchanges that are outside the control of a country. Regarding this point, he also said that the Organization for Economic Co-operation and Development has presented a framework for exchanging information on virtual currency taxation between countries, but this has not yet been implemented.
What is DEX (Distributed Exchange)?
A decentralized exchange built on blockchain. It is also called “DEX” from “Decentralized EXchange”, which is an English translation of “decentralized exchange”. Since transactions are conducted directly between parties without going through a central administrator, there is no need to pay a fee to the administrator, and other features include low liquidity and the user managing the private key.
Discussing PoW taxation, etc.
The IMF also discussed, as one possible solution, a proposal to tax miners who mine proof of work (PoW) because of their environmental impact.
While proposing that it is appropriate to impose a carbon tax targeting miners, it also states that it is necessary to consider a different mechanism.
What is Proof of Work (PoW)?
A consensus algorithm that approves and generates new blocks by performing calculations (mining) on a computer. If the approval is successful, you can receive newly issued virtual currency as a reward. Since the amount of calculation is enormous, there are disadvantages such as requiring a high-performance computer and consuming a large amount of power.
Furthermore, since the cryptocurrency market is divided into large holders called “whales” and small holders, fairness is required in terms of taxation. He also proposes the idea of imposing a flat rate tax on anonymous transactions.
The IMF explained that according to various studies, about 10,000 high volume holders hold a quarter of all bitcoin (BTC).
The IMF has also calculated the tax revenue from imposing a 20% tax on cryptocurrency capital gains. Taking 2021 as an example, when prices were soaring, approximately 14 trillion yen (approximately $100 billion) was raised around the world, equivalent to 0.4% of the world’s total tax revenue.
On the other hand, it is estimated that global cryptocurrency tax revenue will average less than 3.6 trillion yen ($25 billion) per year at a time when prices have fallen from their peak.
Situation in Japan and the United States
Currently, each country is considering and developing a virtual currency tax system.
In June, Japan’s National Tax Agency issued an interpretation notice regarding partial revisions to corporate tax rules, stipulating that virtual currencies issued by companies will not be subject to mark-to-market valuation under certain conditions. This will be a step towards improving the business environment.
connection: National Tax Agency officially announces partial revision of virtual currency corporate tax rules
In the United States, Democratic congressmen and others submitted a letter to the U.S. Treasury Department and others in June. It called for issuing reporting rules to prevent tax evasion on cryptocurrency transactions.
connection: US Democratic lawmakers seek to issue rules to prevent tax avoidance of virtual currency transactions