How the Crypto Industry Is Paying More and More of Its Taxes

Source: Adobe/amirul syaidi
  • “Crypto startups have increasingly moved ashore and avoided tax havens.”
  • There are “huge gaps between how crypto is perceived and how it is taxed.”
  • The rapidly changing nature of cryptography continues to introduce new complications and ambiguities.

Crypto is now a billion dollar industry. While reports covering the entire industry are spotty and overly conservative, filings from individual companies testify to the growing scale of crypto, with Coinbase and alone generating $7.35 billion and $1.5 billion in revenue in 2021, respectively.

These are relatively large numbers, but they raise an important question regarding taxation. Because crypto-related businesses benefit from resources and infrastructure that have been cultivated in part through taxation (e.g. educated people, energy networks, telecommunications networks), there is a strong case for say that they should, in turn, contribute to the system from which they benefit.

So few crypto companies are publicly traded, which means it’s next to impossible to say for sure how much the industry as a whole actually contributes to public finances. However, industry figures claim that all legally registered businesses comply with all applicable tax laws in their respective jurisdictions, implying that crypto’s tax bill is indeed increasing along with its revenue and profits.

The Crypto Industry and Taxation: Safe Havens and Reputational Risks

The relationship between the crypto industry and taxation is a mystery, if only because so many major crypto exchanges and businesses are registered in tax havens.

For example, BinanceThe holding company is reportedly currently registered in the Cayman Islands, a tax haven where corporations pay no income, capital gains, payroll or other direct taxes. In the same way, BitfinexComment is registered in the British Virgin Islands, BitMEX and OKX (formerly OKEx) in the Seychelles, and Houbi in Gibraltar, to name a few.

Not only is Binance the largest crypto exchange in the world by volume, but the registration of so many other major exchanges in havens indicates that they – and the industry as a whole – are evading payment of the kind of tax that they would if they were where most of their customers are also.

However, despite the fact that the industry – like many other industries – does not pay all the taxes it theoretically could, commentators suggest it is getting better at contributing to the public purse. Indeed, for stock exchanges and other companies creating countries that are not tax havens, they have no choice but to pay taxes if they want to be regulated.

“While in 2017 it was standard practice for many [initial coin offering] teams to set up companies in the British Virgin Islands, Seychelles or other tax havens, as far as I know, crypto startups have increasingly moved ashore and avoided tax havens. This is mainly due to reputational risks,” said Niklas Schmidt, tax partner at the Austria-based law firm. Wolf Theiss.

Schmidt says the problem of legal tax evasion in crypto is “overblown,” an account backed by various industry bodies. For example, CryptoUKChief Executive Ian Taylor reports that the trade association is closely monitoring the UK government’s handbook on crypto-assets, to advise its members on how best to comply with all applicable tax requirements.

“Companies that engage in business involving exchange tokens (such as bitcoin) are liable to pay tax in the UK. The tax they are liable to pay depends on the type of activity involved (and whether such activities are considered a trade), but most businesses will pay a combination of capital gains tax, corporation tax, corporation tax on taxable gains, income tax, [national insuranc] and [value added tax],” he said

Taylor reports an improving picture regarding the crypto industry and taxation, especially as larger and more “traditional” companies get involved in the space.

“As adoption grows, we’re seeing big companies start buying crypto and putting it on their balance sheets — You’re here, for example – and they must account for it. At the smaller end of the scale, some companies may invest in crypto and not necessarily report on it – but most will hire an auditor, so they will be recouped through that,” he said. he declares.

CryptoUK chief executive admits some crypto businesses still use tax havens, but suggests much of that use stems from uncertainty surrounding tax and crypto regulations, rather than strong intent to avoid paying taxes.

“Governments and tax offices around the world are still debating how to deal with cryptocurrencies. This means huge discrepancies between how crypto is perceived and how it is taxed,” he explained.

DeFi and NFT complicate the picture

In some ways, the tax requirements are becoming clearer for businesses that work in the crypto industry. However, the rapidly evolving nature of crypto continues to introduce new complications and ambiguities, with NFTs and DeFi-linked crypto-assets expanding opportunities for potential tax avoidance.

“With regard to DeFi tokens, German law does not provide clear guidance, so that great difficulties arise at the transaction level to tax exactly these transactions,” said Professor Philipp Sandner, the head of the Frankfurt School Blockchain Center.

Sandner also points to a similar problem with NFTs, with the broader implication being that tax is potentially unpaid.

“It is very very difficult for traders (individuals) to calculate their tax because easy-to-use IT solutions do not yet exist. They exist for bitcoin and others, where tax calculation is feasible […] But crypto enthusiasts find it difficult to calculate their tax burden for NFT trading,” he said.

Although individual traders cannot be called the “crypto industry”, these issues also affect institutions and funds, which are the backbone of the industry.

“The core of the tax issues lie in how investors handle their crypto investments. We have just launched a tax working group to bring our members together around common tax issues, largely in response to HMRC [Her Majesty’s Revenue and Customs]February’s updated DeFi staking and lending guidelines,” said Ian Taylor.

According to him, CryptoUK and its members have decided to initially focus on NFTs, largely because they see growing complications both in terms of taxation and legal treatment.

Listed and regulated companies pay taxes

All of this reinforces the suspicion that the crypto industry as a whole is getting away with paying a considerable amount of tax, if only because confusion and ambiguity continue to reign over the relevant laws. .

For this reason, it is extremely difficult to determine how much the sector currently pays in taxes. That said, the few crypto-related companies that are publicly traded (and therefore must publish financial statements) give an indication of what the regulated half of the industry pays.

For example, in its most recent letter to shareholders, Coinbase disclosed net income for 2021 of approximately $7.35 billion and an effective tax rate of 6%. Similarly, (mining company) Bit FarmsThe most recent financial statement – for the third quarter of 2021 – revealed that he paid $10.9 million in income taxes this quarter, on net income (before tax) of $34.7 million. dollars.

This shows that while we cannot calculate a reliable total of the amount of tax it pays, the crypto industry is increasingly contributing to public finances. And as the market matures and more of the sector is regulated, it can be expected to increasingly help fund the public resources and infrastructure it benefits from.
Learn more:
Crypto Tax Trends in 2022: Increased Reporting, Updated Rules, and the Wealth Tax Debate
– Small survey shows US crypto investors have big problems with taxes

– How and why crypto suffers from unfair treatment by regulators, politicians and the media
– Pandora articles expose how World Elite uses legacy funding to hide fortunes

– Walking the U.S. Crypto Tax Tightrope
– How to protect your crypto earnings and avoid being audited for your crypto transactions in the United States

– India confirms discriminatory tax rate for crypto investors
– Proposed U.S. Unrealized Gains Tax Could Become a “Penalty for Success” in Crypto

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