Tax Agencies Worldwide Intensify Crypto Monitoring as Bitcoin Value Surges

Tax agencies worldwide are intensifying their efforts to monitor and regulate cryptocurrency transactions, with a particular focus on Bitcoin, as its value continues to rise. According to Robin Singh, CEO of Koinly, tax authorities are expected to enhance their crypto-tracking systems significantly before Bitcoin reaches the $1 million mark. This proactive approach is driven by the increasing complexity and volume of crypto transactions, which pose challenges for traditional tax enforcement methods.

Crypto investors should not underestimate the vigilance of tax agencies, which are not only focusing on future transactions but also scrutinizing past activities. Many jurisdictions have the authority to review previous years' tax returns, and if significant crypto-related income is discovered, tax authorities are unlikely to overlook it. This could lead to complications for investors who have already spent their crypto profits without proper tax reporting.

Governments are increasingly mandating more detailed reporting methods for crypto transactions. For instance, the IRS in the United States has recently required investors to use the wallet-by-wallet cost tracking method, which provides more data to tax authorities. This shift from the universal wallet method, which was less labor-intensive, reflects a broader trend towards more stringent reporting requirements. Several major crypto exchanges, including Coinbase and Binance.US, are already issuing Forms 1099-MISC to the IRS for users with over $600 in rewards annually, indicating a growing trend of automated data sharing.

The global approach to crypto taxation varies widely, with each tax agency adopting its own methods. For example, the Australian Tax Office (ATO) automates stock cost and sale reporting through pre-filled data for taxpayers, but crypto data is not included in this pre-fill. Instead, any activity on a centralized exchange triggers an alert on the taxpayer’s tax return, signaling that the ATO is aware of the crypto activity. This system relies on the taxpayer's honesty in reporting capital gains or losses, but consistent alerts over several years without reporting could increase the risk of an audit.

As tax authorities worldwide enhance their crypto monitoring systems, the era of self-reporting is coming to an end. Once these systems are fully developed, tax authorities can retroactively review previous years' transactions. The ATO, for instance, already has an intensive data-matching program with centralized exchanges. This trend is expected to continue, with tax authorities strengthening their cooperation and data-sharing agreements in the coming years. In March 2024, Australia and Indonesia reached an agreement to exchange tax information, with a focus on crypto. Similarly, 47 national governments, including the United Kingdom, Brazil, Germany, and Japan, committed to the Crypto-Asset Reporting Framework (CARF) and planned to activate exchange agreements for information sharing by 2027.

Decentralized finance (DeFi) and non-fungible tokens (NFTs) are not exempt from this scrutiny. Tax authorities are aware of the gains made on decentralized exchanges and are introducing guidance to collect user data from non-custodial brokers. While tracking DeFi transactions may be more challenging, tax authorities are bringing in experts from the crypto space to understand and address potential loopholes. This proactive approach underscores the determination of tax agencies to ensure compliance in the rapidly evolving crypto landscape.