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Tax authorities around the world are increasingly grappling with investments into “new” asset classes and investment products that are not as familiar as property, bonds, shares, collective investment schemes and retirement funds.
Crypto assets have a current market capitalisation of more than US$2 trillion. In comparison, total assets under management world-wide were US$120 trillion in 2023.
“Investments in cryptocurrencies are no longer insignificant, and we cannot ignore them,” says Oktavia Weidmann, UK tax specialist on cryptocurrencies and derivatives.
Generational shift
Speaking at the International Fiscal Association’s congress in Cape Town, Weidmann said there is a generational shift in how people generate, store and spend their wealth.
“The younger generation is not interested in shares, bonds and property. They travel the world, compete in e-sports and make money from buying and selling non-fungible tokens (NFTs) and in-game items. The market for in-game items is US$50 billion yearly.”
The younger generation also invests in bitcoin and other crypto currencies.
Weidmann says crypto exchange-traded funds (ETFs) and crypto structured products and crypto derivatives have been on the rise in recent years.
The crypto derivatives market has a share of 70 percent of the total crypto market and assets under management in crypto ETFs are already US$60 billion.
Tax authorities are struggling with the taxation of the digital assets.
“They are used to high-net-worth individuals who generate their money through more traditional avenues such as property, inheritance, bonds and shares.”
Taxing digital assets
Weidmann says there are several issues around the taxing of these new digital assets.
The three main problems:
The assets are not only highly liquid but also difficult to trace.
Tax authorities are having trouble obtaining information regarding the crypto holdings of taxpayers in their country of residence as these assets are held in the cloud.
On top of that, crypto exchanges are often in remote locations like the Seychelles.
There is no physical manifestation.
Tax authorities need to ascertain where the asset is. In the UK the tax authority taxes crypto assets based on the residency of the beneficial owner.
Another issue that concerns tax authorities is what to do with unrealised crypto gains and exit taxes when people move from one country to another.
“Many of these issues are not yet settled,” says Weidmann. However, tax authorities want their cut and there have been some initiatives as they try to get a grip on taxing these assets.
One such an initiative comes in the form of the European Union’s tax transparency rules for crypto transactions. In terms of these rules, crypto asset service providers are required to report crypto transactions made by EU clients.
“It is important to educate tax authorities on this new asset class to ensure that crypto assets will be taxed properly,” she adds.
Taxing the known
While the authorities are grappling with the relatively unknown assets, they continue taxing the known. — Moneyweb.
Online Reporter