Crypto-assets And The Tax Compliance Challenge

Unlike traditional financial assets, cryptocurrencies operate within a decentralised and pseudonymous framework. Transactions are recorded on a blockchain, offering transparency at the transaction level but without revealing users’ identities. This pseudonymity provides some secrecy level and introduces significant challenges for tax compliance. The rapid growth of crypto markets has created an expansive financial ecosystem where assets can be held, traded, or transferred across borders with limited government oversight. Currently, with no third-party reporting and an increasing adoption of crypto-assets, regulators are facing an unprecedented challenge. Tax authorities worldwide struggle to track crypto holdings and enforce tax compliance, relying mostly on self-reporting. As a result, it is assumed that a substantial amount of crypto gains is escaping the tax system.

Characteristics Of Crypto Self-Reporters

With the secrecy revolving around crypto assets, it’s not straightforward to know who these users are. In a study I conducted with my co-authors Andreas Økland and Elvin Le Pouhaer ‘Who owns cryptocurrencies?’, published by Skatteforsk Tax Centre, we analyse crypto self-reported data to the Norwegian tax administration and unveil certain trends. The tax returns reveal that cryptocurrency owners are younger than the general population. Taxpayers aged 30-49 own around 75 per cent of the cryptocurrency self-reported in the tax returns. In contrast, these young taxpayers own less than 35 per cent of wealth (excluding crypto) recorded in the tax returns.

Wealth distribution in the cryptocurrency ecosystem reflects certain parallels with traditional finance, yet differs in notable ways. In traditional finance such as stock ownership, wealth is highly concentrated among older and high-net-worth individuals. For cryptocurrencies, there is a clear wealth gradient to ownership, even when ranking by non-cryptocurrency wealth. Wealthier individuals invest in larger quantities of cryptocurrency than those at the bottom of the distribution, although younger investors from varying financial backgrounds are more likely to invest.

Even with the clear wealth gradient, the data shows that crypto ownership is more evenly spread among lower wealth brackets compared to traditional wealth. Ranking the population by the total wealth distribution (total wealth excluding crypto), the top one per cent own around 20 per cent of total traditional wealth and 30 per cent of total wealth including crypto. The bottom 50 per cent hold around 12 per cent of total traditional wealth and 24 per cent of total wealth including crypto. This suggests that the bottom 50 per cent are more involved in crypto than traditional wealth. It is interesting to see that crypto is more appealing to the bottom 50 per cent as it could be a way to make more gains. In short, while crypto wealth is concentrated among the wealthy, it has attracted those in lower wealth brackets, giving them a relatively larger share than they hold in traditional assets.

Cryptocurrency owners are also overwhelmingly male, highly educated, and earn a higher income with respect to the average Norwegian population. They are also more likely to invest in stocks, use foreign bank accounts, and have a higher debt-to-income ratio. Interestingly, crypto investors reported more proceeds from gambling or lottery than the average population. Around 0.5 per cent of those with cryptocurrencies had recorded a proceed from lottery or other gambling on their tax return during the last ten years, compared to 0.3 per cent of the general population. This could suggest the similar pattern that crypto could offer with its fast-increasing price.

With more transparency, these characteristics may shift. These results are based on self-reporting which captures only part of the picture on crypto owners. Transparency measures could provide regulators with more accurate data on the wealth distribution of crypto owners, allowing for a clearer understanding of how these assets affect national and global wealth inequality.

Tax Compliance And Crypto: The Case Of Celsius

In July 2022, the cryptocurrency platform Celsius filed for bankruptcy protection under the so-called ‘Chapter 11 Bankruptcy relief’. Celsius Network was a cryptocurrency lending platform founded in 2017. It allowed users to deposit cryptocurrencies like Bitcoin and Ethereum to earn interest, or use them as collateral for loans. At its peak, Celsius managed nearly $12 billion in assets and had issued over $8 billion in loans for customers from all over the world. The company collapsed around June 2022 and filed for bankruptcy protection under Chapter 11. It had to publish the schedule of assets and liabilities reflecting the balance of each retail customer on 13 July 2022. This deposit database includes customers’ names and their balances of different cryptocurrencies deposited. Additionally, they had to file a statement of financial affairs for the period between 14 April and 13 July 2022. This list includes customers’ names, the date of their transactions, the type of coin involved, the incoming or outgoing nature of the transactions as well as their purpose, and the amount transacted both in coin and dollar value.

In our research, we combined this data to create a deposit database that reflects each customer’s holdings of different cryptocurrencies in Celsius as of 14 April 2022, before the market turmoil in May, and when Celsius users were not expecting its bankruptcy nor any outside insight into their holdings. We identify those with Norwegian names and match them to a unique non-anonymised dataset covering all Norwegian taxpayers aged 18 or older for the year 2021. This enables us to estimate the compliance with respect to crypto self-reporting as the data matched to have info on taxable income, taxable wealth, and taxes paid.

Our main estimate is that 40 per cent of Norwegian cryptocurrency owners self-report their cryptocurrency wealth. This leaves a substantial 60 per cent of crypto as non-declared to tax administration. The compliance varies across cryptocurrency holders’ characteristics. Looking at age, crypto investors in their thirties are more likely to self-report with a reporting rate of 55 per cent. Those over 60 constitute the least compliant group, with a reporting rate of 20 per cent. The youngest age group (18-29) have a self-reporting rate of 28 per cent, while those in their forties and fifties have a rate of 39 per cent. Looking at income and wealth, we also find a strong income gradient in reporting rates. The bottom half of the non-cryptocurrency income distribution has an average reporting rate of 28 per cent, while this figure increases to around 45 per cent for the middle 49 per cent, and to 64 per cent among the top one per cent. In contrast, we do not find a wealth gradient.

Taking into account the non-compliance we observe, we correct the data with these missing reporting. After correction, taxpayers between 25 and 29 now form the group with the highest share of cryptocurrency owners, and the wealth gradient becomes more pronounced.

More Transparency In The Upcoming Years?

CARF and DAC8 establish new regulatory frameworks for crypto asset reporting, much like the standards applied to traditional offshore financial holdings.

DAC8, a significant addition to the EU’s Directive on Administrative Cooperation, mandates that crypto-asset service providers report user transaction data to tax authorities. This framework for automatic information exchange mirrors regulations for traditional financial institutions, such as the Common Reporting Standard (CRS). Under DAC8, crypto platforms will be required to disclose transaction data, potentially reducing underreporting and closing tax gaps. Set to take effect in January 2026, DAC8 aims to harmonise crypto compliance across the EU, making it harder for users to hide assets across member states.

CARF, introduced by the OECD and inspired by the success of CRS, seeks to implement similar global transparency for crypto, enhancing cross-border tax-compliance. Expected to become a standard worldwide by 2027, CARF could significantly reduce opportunities for tax evasion in crypto.   CARF applies similar reporting standards to those of existing frameworks, ensuring more transparency in crypto asset ownership for effective tax collection.

Increased transparency will likely encourage more users to voluntarily comply with tax reporting obligations. With DAC8 and CARF in place, crypto assets may no longer offer the privacy or tax evasion appeal they once did. Many investors may view voluntary compliance as a lower-risk alternative to potential penalties. But how successful can these measures be? It will largely depend on how much countries are willing to take part in these cooperative measures. Investors could shift their crypto investments to countries not covered by the exchange of information regulations. Even if all countries are on board, there would still be room to secrecy via the blockchain. Instead of using centralised platforms, investors could opt for decentralised options by purchasing directly on the blockchain. Crypto is still a rising new asset, and the future definitely holds more for this new technology.

Dr Mona Baraké
Mona Baraké is a PostDoctoral Researcher at Skatteforsk Centre for tax research, specialising in public economics, financial economics, and taxation. She has several publications related to tax havens, tax planning and tax revenue, and won the Best paper award (Franco-German Fiscal Policy Seminar 2022) for work on Pillar Two. She was previously a PostDoctoral researcher at the EU Tax Observatory (2021-2024) and has a PhD in Economics From Paris 1 Panthéon Sorbonne (2020).