Bitcoin tax evasion cannot be stopped simply by fighting money laundering: IMF report

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Anti-Money Laundering (AML) rules aren’t a panacea for tackling tax evaders and criminals trying to cover their tracks with crypto, but they are a logical starting point, according to an article published Wednesday by the International Monetary Fund (IMF).

The paper was authored by members of the IMF’s Fiscal Affairs Department: Katherine Baer, ​​Ruud de Mooij, Shafik Hebous, and Michael Keen. It includes a disclosure that the opinions expressed by its authors do not necessarily reflect the views of the IMF.

From a tax perspective, the main concern of the paper is that digital assets offer criminals and the wealthy a new and powerful way to transact undetected. And its authors acknowledge that tens of billions of dollars in potential tax revenue are at stake, with no consensus across the world on how to approach the issue.

The authors make it clear that they do not intend to provide policy prescriptions, but also write that governments can look to current United States regulations and laws as a guide to stopping financial crimes and illegal activities.

Whether crypto wilts or flourishes, the tax system still has to deal with it, the IMF authors said. Nonetheless, the first step for governments is to enforce anti-money laundering rules and third-party reporting requirements where they can.

In terms of AML rules, the document refers to guidance issued by the Financial Action Task Force in 2015, which is meant to serve as a global standard to combat money laundering, but acknowledges that not all jurisdictions fully comply with them. .

The paper notes that centralized institutions such as exchanges are in a unique position to help authorities obtain information about the ownership of digital assets, often serving as the point of contact where money is exchanged for crypto, and able to follow the activity beyond.

The IMF paper estimates that a global capital gains tax of 20% in 2021 could have raised around $300 billion from crypto-related transactions. Still, the authors said the Know-Your-Customer (KYC) procedures that help them stay compliant with anti-money laundering regulations are not enough to paint the full picture for tax authorities.

KYC rules could let authorities know, for example, that someone has cashed in a certain amount of cryptocurrency, the authors said. But from transactions prior to the one recorded on the blockchain, it will not be possible, without more information, to identify any associated capital gain or loss.

In that sense, the technology behind many cryptocurrencies could actually be a boon to tax authorities, the authors wrote, claiming that blockchains are remarkably transparent in the historical information they contain. transactions.

Artificial intelligence could be used to some extent to identify potentially tax-relevant behaviors occurring on-chain, the IMF authors said, describing the large amount of public information about the networks as ripe for analysis. forensic.

Some critics, however, like whistleblower Edward Snowden, have criticized exchanges, particularly Coinbase, in the past for over-compliance and called it a drag on the crypto space.

But in the event that governments adopt AML and KYC, the document details other challenges that could arise if it pushed bad actors into decentralized exchanges, where it would be harder to glean information without anyone complying. reporting requirements.

And the main obstacle described in the document would remain, which is the element of pseudo-anonymity associated with cryptocurrency transactions. Digital wallets are made up of public and private keys. If an entity does not link a person’s name to a digital wallet, it becomes more difficult for authorities to know who owns it, unless a person discloses it themselves.

Overcoming pseudo-anonymity is the central problem tax administrations are now trying to address, the IMF said. It used to be that the taxman’s problem was that he knew who you were, but not your income; now the problem is that he knows your income but not who you are.

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