IMF Asks Nigeria, Others To Charge VAT, Capital Gains Tax On Crypto Assets

IMF Asks Nigeria, Others To Charge VAT, Capital Gains Tax On Crypto Assets

9 months ago
3 mins read

The International Monetary Fund (IMF) said Nigeria and other countries didn’t take advantage of the opportunity to generate $100 billion from the cryptocurrency industry.

IMF, in a report titled; “Crypto Poses Significant Tax Problems—and They Could Get Worse,” said Nigeria and other countries could have taxed the crypto industry 20 per cent amid the boom in 2021, which would create $100 billion in tax revenue.

The Fund said the countries couldn’t due to various challenges, which include classifying the crypto assets and also the pseudonymity nature of the cryptocurrency market.

“Crude estimates suggest that a 20 percent tax on capital gains from crypto would have raised about $100 billion worldwide amid soaring prices in 2021. That is about 4 percent of global corporate income tax revenues, or 0.4 percent of total tax collection,” IMF noted in the report. 

However, the projection is now down to $25 billion a year, as the crypto market suffered a significant selloff amongst holders, which led to the poster asset of the industry, Bitcoin, dropping in value, from $70,000 in 2021 to an average of $29,000 per coin.

“But with total crypto market capitalization down 63 percent from the late-2021 peak, tax revenues would then have shriveled. 

“If these losses were fully offset against other taxes, there would be a corresponding reduction in revenue. In more normal times and with the current market size, global crypto tax revenues would probably average less than $25 billion a year. That, in the broader scheme of things, is not a huge amount.” IMF revealed. 

Charge capital gains, VAT on crypto assets 

Advising Nigeria and other countries on how to classify crypto assets, IMF said governments across the world are unsure if crypto assets should be viewed as property or currency.

IMF explained that should crypto be sold for profit, then countries should tax capital gains on the proceeds as they will do on any other assets. 

Also, the international financial body advised that value-added tax (VAT) can be charged should purchases be made with crypto. 

“A key issue is how to classify crypto assets—should they be regarded as property or currency? When crypto is sold for profit, capital gains should be taxed as they would be on other assets. And purchases made with crypto should be subject to the same sales or value-added taxes, or VAT, that would be applied for cash transactions. 

“So, one important task is to ensure application of these principles, which requires clarity on how to characterize crypto for tax purposes: in essence, as currencies for VAT and sales taxes and as assets for income tax purposes. While this is not easy due to the evolving nature of crypto asset transactions, it is perfectly possible. The deepest challenges are then in enforcement,” IMF said. 

How to solve challenges faced by countries in taxing crypto assets 

In the report counselling governments worldwide on how to go about the tax system for crypto assets, IMF said a “Know Your Customer” approach should be adopted in crypto transactions to tackle the pseudonymity enjoyed by crypto holders. 

IMF expressed frustration in identifying the majority of the persons and firms holding cryptocurrency, stating that 10,000 people hold one quarter of all Bitcoin. 

According to IMF, with the pseudonymity nature of the crypto market, holders could evade tax or hide from tax administrators. 

“There is also VAT. Crypto transactions have similarities to those in cash in their potential for being hidden from tax administrations. Today, the share of purchases made with crypto is still small. 

“But widespread use, if tax systems were not prepared, could someday mean widespread evasion of VAT and sales taxes, leading to materially lower government revenues. This may be the biggest threat from crypto,” IMF said. 

IMF further disclosed that: “The most fundamental difficulty in taxing crypto assets is that they are “pseudonymous.” That is, transactions use public addresses that are extremely difficult to link with individuals or firms. This can make tax evasion easier. Implementation is thus at the heart of the matter for tax authorities. 

“The problem is surmountable when people transact through centralized exchanges, since these can be made subject to standard “know your customer” tracking rules, and possibly withholding taxes. Many countries are putting such rules in place with the expectation that tax compliance will improve.” 

It went on to suggest the framework of crypto-related exchange of information between countries, which was developed by the Organisation for Economic Co-operation and Development. 

Although IMF stated that countries adopting the information sharing framework could also pose another challenge, as crypto holders will deepen their usage of decentralised exchanges or go the way of peer-to-peer transactions to avoid being tracked. 

Throwing more light on the issue, IMF said: “However, reporting obligations could induce people to keep tax authorities ignorant by instead using centralized exchanges abroad. To address that concern, the Organisation for Economic Co-operation and Development has developed a framework for crypto-related exchange of information between countries. Implementation, however, is some way off. 

“A more troubling possibility is that reporting rules (and the failures of some crypto intermediaries) could induce people to transact increasingly through decentralized exchanges or directly through peer-to-peer trades where no central governing body oversees these transactions. Those are still extremely difficult for tax administrators to penetrate. 

“Given the complexity of the fundamental challenges posed by pseudonymity, the rapidity of innovation, the vast information gaps, and the uncertainties ahead, the tide has not yet turned in the battle to incorporate crypto properly into the wider tax system. Some of the elements needed for doing so—such as clarity in their classification for tax purposes—are clear. 

“But the challenges are fundamental, and the risks, particularly to the VAT and sales taxes, may be greater than people recognize. As many (though far from all) governments are beginning to realize, policymakers need to develop clear, coherent, and effective frameworks for taxing crypto.”


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