Cryptocurrency Gains Taxes: Are You Actively Evading Them?
NFT, Altcoin, Wallet, Web 3.0, DeFi – if you know these buzzwords, this article is probably for you. Cryptocurrency has been the talk of the town (and metaverse) for years and slowly gaining traction in recent times. Given its popularity, it’s no wonder most crypto fanatics and governmental institutions are putting the focus on taxation in this domain.
A New Era of Economy: Tokenomics
Welcoming Tokenomics, a space that operates on a unique economic principle. While this may not be fully appreciated by tax authorities, there have been quite a number of journals that seek to understand the economics of information goods such as Non-Fungible Tokens (NFT).
To put it simply, an information good adopts 2 general characteristics:
- The cost of creating an information good is the time spent in curating the artworks, computer resources to host these digital works and the human cost of marketing it in various platforms like Discord in the case of NFTs
- The marginal cost of distribution of an information good is close to NIL as digital goods can be copied and transmitted at low or no cost.
As profits moon, there will be noise that will alert the relevant tax authorities or governmental bodies to take action.
A Taxing Situation that Blurs the Line
Putting our tax lenses on, such high value information goods are bound to attract tax and individuals who wish to pay lower income tax may migrate to a tax haven jurisdiction. Is that ethical? This is actually quite common among businesses and individuals that go beyond cryptocurrency gains taxes.
The income that is generated from intangible assets like NFTs are basically codes that can be hosted from anywhere yet accessible to its client. With the blurred lines of geographical boundaries and the rise of digital assets, the network makes it possible for NFT makers to be in anonymity. As NFT makers live in anonymity, the frustrations from tax authorities grow and this may see an increase in stringent tax obligations that could impact these individuals.
Staking a Claim of Anonymity
Anonymity, coupled with greater access to information regarding tax evasion strategies, makes it much easier for dishonest taxpayers to evade taxes. Tax evasion is performed by actively refusing to divulge revenue sources, such as capital gains from cryptocurrency holdings, especially if the exchange is based in an overseas jurisdiction. Authorities from such jurisdictions do not have the control of the entity to disclose or seek information.
Mining NFT Tax Evasion Activities
Tax evasion generally requires:
- Non-disclosure of income to tax authorities
- A low-cost intermediary to enable the evasion
NFT profit is an enabler of tax evasion because of two key factors:
- Setting up an offshore bank account or a holding company along with step-by-step instructions on how to transfer the amount offshore
- 80% of websites that speak about tax havens actively promote illegal tax evasion
As a result of such activities, governments have been emphasising on exchanging cross-border tax information.
Food for Thought
While there have been some grey areas in this domain, do you think that paying taxes on our cryptocurrency holdings is a reasonable or strategic move from tax authorities? We want to hear from you in the comments below.
Key Reference Source:
Cockfield, A., Hellerstein, W. and Lamensch, M., 2013. Taxing Global Digital Commerce. The Netherlands: Kluewer Law International.