Crypto Assets: What Issues Do They Pose for Transfer Pricing?

Abstract

Our chapter starts off with a brief introduction to crypto assets, explaining the underlying technology and providing a basic overview of their classification. It then looks at a range of common tax and transfer pricing issues that may arise over the course of the “life-cycle” of a crypto asset.

One of the key points that will be established is the need to identify a tax differential before transfer pricing considerations come into play. In other words, what kind of transactions involving crypto assets will result in a taxable gain or deductible loss that can have an impact on the overall tax liability of a taxpayer? In the absence of this tax differential, there are limited incentives for taxpayers to engage in transactions with non-arm’s length transfer pricing.

The chapter then addresses three main issues which crypto assets pose for transfer pricing: 1) limited market activity; 2) extreme volatility; and 3) pseudonymity.

Firstly, the majority of crypto assets have very little market activity, making it difficult to determine their open market value. For every well-known digital token like Bitcoin, there are hundreds, if not thousands, of virtually completely unknown tokens held by a mere handful of people. This may create considerable difficulties in establishing an arm’s length price.

Secondly, even the most established crypto assets tend to be subject to extreme volatility in terms of their market values. This volatility has to be factored in when determining an arm’s length price as depending on the type of transaction and its contractual terms, at least one party will have to bear the risk (and potential upside) of the fluctuating value of the crypto assets.

Thirdly, global regulatory frameworks are currently still in their infancy and are not yet ready to overcome the issue of pseudonymity. Tax authorities may be unable to match taxpayer identities to wallets, making it difficult to determine the parties to a transaction and, ultimately, if the transacting parties are related enterprises as defined by the respective domestic law.

While crypto assets are a relatively new asset class, the transfer pricing challenges which they raise are by no means novel. Existing solutions which have been employed in the past to deal with transactions that exhibit similar characteristics may be productively revisited and adapted for use in these new contexts. Throughout, this paper stressed the potential of crypto assets to be used for tax avoidance and the need for transfer pricing practice to keep pace with the evolution of technologies and business practices involving crypto assets.

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

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