Report on the Challenges which Digital Assets Pose for Tax Systems with a Special Focus on Developing Countries

(13 March 2023) (International Tax and Development Cooperation Branch, Financing for Sustainable Development Office, United Nations Department of Economic and Social Affairs)

78 Pages Posted: 30 Mar 2023 Last revised: 23 May 2023

See all articles by Vincent Ooi

Vincent Ooi

Singapore Management University - Yong Pung How School of Law; Singapore Management University - Centre for AI & Data Governance

Date Written: March 7, 2023

Abstract

The paper highlights the need for governments to carefully consider the implications which the rise of crypto assets can have on tax systems, noting that the absence of a deliberate policy position would be a policy decision in itself, with consequences for the tax base. It discusses four main classes of tax risks which crypto assets pose.

Firstly, crypto assets and crypto transactions can act as ‘functional substitutes’ for traditional assets and transactions. As existing tax laws are drafted without crypto assets in mind, this can produce a host of unintended tax consequences and produce opportunities for tax arbitrage.

Secondly, the values of crypto assets exhibit significant volatility, with extreme swings in the values of tokens on average. There are also issues of potential instability in crypto markets, as evidenced by the recent ‘crypto winter’. In the absence of appropriate safeguards and ring-fencing, these crypto losses could potentially be used to set off income from other sources, resulting in a significant erosion of the tax base.

Thirdly, crypto assets give rise to certain events which may not have a traditional equivalent, such as mining and forging. Tax systems which do not consider these new potential sources of revenue risk losing out.

Fourthly, crypto assets may be used to facilitate tax evasion. The pseudonymity offered by crypto assets and the opportunities to conduct transactions outside of the traditional banking system inherently poses the risk of tax evasion, both premeditated and incidental (for example, through the shadow economy).

Annex A1 builds on a lot of my prior work on crypto taxation and provides a very comprehensive introduction to crypto assets and their taxation.

The paper recommends that governments should consider evaluating the risks to their tax systems posed by crypto assets, develop crypto tax guidance for both internal tax authority use and for taxpayers, and work on training and capacity building in crypto taxation.

Keywords: Taxation, taxation law, tax law, cryptocurrencies, digital tokens

JEL Classification: K34, F38, H2, H20, H24, H25, H26, H27, H29

Suggested Citation

Ooi, Vincent, Report on the Challenges which Digital Assets Pose for Tax Systems with a Special Focus on Developing Countries (March 7, 2023). (13 March 2023) (International Tax and Development Cooperation Branch, Financing for Sustainable Development Office, United Nations Department of Economic and Social Affairs), Available at SSRN: https://ssrn.com/abstract=4395761 or http://dx.doi.org/10.2139/ssrn.4395761

Vincent Ooi (Contact Author)

Singapore Management University - Yong Pung How School of Law ( email )

55 Armenian Street
Singapore, 179943
Singapore

HOME PAGE: http://vincentooi.com

Singapore Management University - Centre for AI & Data Governance ( email )

55 Armenian Street
Singapore
Singapore

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