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Report: Bitcoin Yields $30B in Capital Gains Annually, But Collecting Taxes Proves Challenging

Ruth Singleton
Published Date:
Jun 23, 2022


A recently issued report has found that U.S. holders of Bitcoin realize capital gains from the cryptocurrency amounting to approximately$30 billion per year. According to Accounting Today, if these capital gains were successfully taxed at the 15 percent rate, they would yield $4.5 billion in additional government revenue.  

But authorities that seek to collect taxes on those capital gains faces several challenges. Data released by CoinTracker found that  96 percent of cryptocurrency investors had not filed their tax returns as of March 27, 2022. In comparison, Americans overall, had filed roughly 40 percent of the individual returns by that date.  

The report was prepared by IVIX, which creates software to help tax authorities “illuminate shadow economies to ensure that everyone complies with the tax code.” To prepare the report, IVIX analyzed transactions on the Bitcoin blockchain. It built tools for estimating characteristics such as transaction size and capital gains from transaction data from the Bitcoin blockchain and set up Bitcoin nodes to capture additional information directly from the blockchain, such as the volume of nodes in a certain geolocation. 

The report noted that, in the United States, income taxes arise when crypto is mined, received as salary, or airdropped. Capital gains taxes arise when cryptocurrency is exchanged either into another cryptocurrency or into fiat currency, or when payments are received for goods or services. IVIX found that 80-90 percent of the value of cryptocurrency received is received through trading on crypto exchanges, while only 2 percent of crypto transactions involve making purchases. Thus, it concluded that capital gains incurred by trading on exchanges and marketplaces offer the greatest return on investment in compliance. 

The report noted that know your customer (KYC) and anti-money laundering (AML) requirements don’t apply to crypto wallets, so that money services businesses don’t have to collect information about their users. The report said that Congress passed a bill that would introduce two reporting requirements aimed at improving tax compliance: a requirement for so-called “digital brokers” to issue 1099-B forms for their customers, and a requirement that extends Section 6050I of the U.S. tax code, requiring recipients of transactions over $10,000 to report certain information about the person from whom the payment was received.  

The report said both would have a significant positive effect on tax compliance, but that “they don’t fully solve the challenge of calculating capital gains that run through unregulated exchanges.” In the report IVIX  recommends policy changes to close this loophole. Such changes include requiring MSBs to report crypto wallets used by their customers, regulating decentralized finance (DeFi) exchanges and marketplaces, assuming full capital gains if the taxpayer can’t provide a cost basis, and preparing now for a higher volume of capital gains in the future. 

The report concluded, “The crypto market in the United States is large and growing quickly. Strengthening reporting, particularly of capital gains, has the potential to provide significant additional tax revenue. Governments that use data to develop policy and technology to support compliance will achieve the most success.” 

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