IMF update

 

Dear MARIA, We just published a new blog—please find the full text below.  Crypto Poses Significant Tax Problems—and They Could Get Worse (Credit: Da-kuk/iStock by Getty Images) By Katherine Baer, Ruud de Mooij, Shafik Hebous, and Michael Keen Crypto assets that can be used as instruments of payment have proliferated into more than 10,000 variants since the 2009 debut of Bitcoin, the first and still the largest. The bewildering speed with which they have developed and the pseudonymity they can provide have left tax systems playing catch up. In a new paper, we discuss how governments can address the emerging challenges of taxing these crypto assets while its use is still limited so that they prevent a leakage in tax revenue and protect the integrity of the tax system. Classifying crypto Views of crypto assets are diverse and held with passion. The prospect of liberating financial transactions from oversight by governments and the involvement of financial institutions is a libertarian dream for some. El Salvador and the Central African Republic have gone so far as to adopt Bitcoin as legal tender. Critics, however, see crypto assets as not merely inherently worthless but a front for crime, scams, and gambling. They also point to their dizzying volatility. Bitcoin, for instance, soared from $200 a decade ago to nearly $70,000 in 2021 before plunging to around $29,000 today. The collapse of FTX last year and recent US Securities and Exchange Commission lawsuits against Binance and Coinbase have fed anxiety among users while the appeal to criminal activities has been reflected in high-profile seizures of billions of dollars. These developments have triggered increasing scrutiny from policymakers and widespread calls for regulation. But whether crypto assets ultimately boom or bust, a coherent way to tax them is needed. A key issue is how to classify crypto assets—should they be regarded as property or currency? When crypto is sold for profit, capital gains should be taxed as they would be on other assets. And purchases made with crypto should be subject to the same sales or value-added taxes, or VAT, that would be applied for cash transactions. So, one important task is to ensure application of these principles, which requires clarity on how to characterize crypto for tax purposes: in essence, as currencies for VAT and sales taxes and as assets for income tax purposes. While this is not easy due to the evolving nature of crypto asset transactions, it is perfectly possible. The deepest challenges are then in enforcement. Revenue considerations Crude estimates suggest that a 20 percent tax on capital gains from crypto would have raised about $100 billion worldwide amid soaring prices in 2021. That is about 4 percent of global corporate income tax revenues, or 0.4 percent of total tax collection. But with total crypto market capitalization down 63 percent from the late-2021 peak, tax revenues would then have shriveled. If these losses were fully offset against other taxes, there would be a corresponding reduction in revenue. In more normal times and with the current market size, global crypto tax revenues would probably average less than $25 billion a year. That, in the broader scheme of things, is not a huge amount. There are also important fairness issues at stake. Though their pseudonymity makes it hard to be sure exactly who holds crypto, there are signs that ownership is heavily concentrated among the relatively wealthy—even though holding of crypto is strikingly common across people with low incomes too. Available surveys indicate that about 10,000 people hold one quarter of all Bitcoin. There is also VAT. Crypto transactions have similarities to those in cash in their potential for being hidden from tax administrations. Today, the share of purchases made with crypto is still small. But widespread use, if tax systems were not prepared, could someday mean widespread evasion of VAT and sales taxes, leading to materially lower government revenues. This may be the biggest threat from crypto. Addressing implementation The most fundamental difficulty in taxing crypto assets is that they are “pseudonymous.” That is, transactions use public addresses that are extremely difficult to link with individuals or firms. This can make tax evasion easier. Implementation is thus at the heart of the matter for tax authorities. The problem is surmountable when people transact through centralized exchanges, since these can be made subject to standard “know your customer” tracking rules, and possibly withholding taxes. Many countries are putting such rules in place with the expectation that tax compliance will improve. However, reporting obligations could induce people to keep tax authorities ignorant by instead using centralized exchanges abroad. To address that concern, the Organisation for Economic Co-operation and Development has developed a framework for crypto-related exchange of information between countries. Implementation, however, is some way off. A more troubling possibility is that reporting rules (and the failures of some crypto intermediaries) could induce people to transact increasingly through decentralized exchanges or directly through peer-to-peer trades where no central governing body oversees these transactions. Those are still extremely difficult for tax administrators to penetrate. Given the complexity of the fundamental challenges posed by pseudonymity, the rapidity of innovation, the vast information gaps, and the uncertainties ahead, the tide has not yet turned in the battle to incorporate crypto properly into the wider tax system. Some of the elements needed for doing so—such as clarity in their classification for tax purposes—are clear. But the challenges are fundamental, and the risks, particularly to the VAT and sales taxes, may be greater than people recognize. As many (though far from all) governments are beginning to realize, policymakers need to develop clear, coherent, and effective frameworks for taxing crypto.   Jeff Kearns Managing Editor IMF Blog jkearns@IMF.org   Thank you again for your interest in IMF Blog. Read more of our latest content here. Take good care!

Seychelles Seychelles Pioneers Novel Financing Instruments and Taps IMF Climate Facility Photo Credit: Diamond Dogs/Getty Images Seychelles is successfully balancing conservation and economic development by tapping innovative financing instruments. The East African island nation relies largely on tourism and fishing for revenue and was the first country to issue a blue bond and to designate its fragile coastal areas for protection in return for a novel deal relieving it of part of its sovereign debt. It is now also the second African country, after Rwanda, to access the IMF’s Resilience and Sustainability Facility (RSF)—funding aimed at helping countries with limited room in their budget address long-term challenges, such as climate change and pandemic preparedness. In an interview with Country Focus, Naadir Hassan, Seychelles’ Minister of Finance, National Planning and Trade (left), and Calixte Ahokpossi, IMF Mission Chief (right), talk about the RSF and Seychelles’ innovative approach to financing its climate goals. How is climate change impacting the economy of Seychelles? Minister Hassan: As a low-lying island nation, Seychelles relies heavily on its coastal zone, making it especially vulnerable to the effects of climate change. About 90 percent of the population and most of the country’s critical infrastructure, such as power stations, food storage facilities and ports, are concentrated in the narrow coastal plateau surrounding the main populated islands of Mahé, Praslin, and La Digue. As sea levels continue to rise, there is an increased risk of coastal erosion, saltwater intrusion into freshwater sources, and damage to buildings and infrastructure. Climate change also poses a threat to the country's pristine beaches and coral reefs, which are major tourist attractions. Tourism is a crucial sector for the Seychelles economy, contributing to over 20 percent of GDP and a quarter of employment. Finally, climate change affects fish populations by altering ocean currents, water temperatures, and ecosystems. This disruption can lead to reduced fish stocks, impacting the economy and livelihoods of many people. We recognize the urgency of addressing climate change and have been actively involved in international climate negotiations. We also have comprehensive adaptation and mitigation strategies in place and a long-term goal of switching to renewable energy to meet our target of zero emissions by 2050. The costs of implementation, however, are large—over US$ 600 million over the next decade, or about 5 percent of GDP per year. We are seeking financial assistance from international organizations to support our efforts. How will the IMF’s Resilience and Sustainability Facility help?    Minister Hassan: The financial support provides much needed fiscal space to implement policies aimed at building resilience, mitigating climate change impacts, and promoting sustainable development. It should also help to catalyze further private financing for climate projects. The technical assistance and capacity building offered by the IMF will also help to strengthen our institutional and policy frameworks. Seychelles was the first country to successfully undertake a debt-for-climate swap aimed at marine conservation. What other innovative climate financing options are you tapping? Minister Hassan: In addition to the climate swap, Seychelles launched the world’s first sovereign blue bond in 2018—a pioneering financial instrument designed to support sustainable marine and fisheries projects. The bond raised US$15 million from international investors and demonstrates the potential for countries to harness capital markets for financing the sustainable use of marine resources. Going forward, the country remains open to considering other innovative climate financing options such as carbon trading and sustainability bonds. Climate change is an existential challenge for us—we believe that we must be creative and innovative in tackling it and are trying to tap all the opportunities we can. What reforms are being proposed under the RSF? Calixte Ahokpossi: The reform measures can be grouped into three areas. First is public investment and fiscal management. The RSF will ensure that budget and project appraisal procedures are revised to help promote climate-resilient infrastructure investments. Second, is the financial sector. The RSF aims to improve Seychelles’ access to climate finance and to strengthen the climate resilience of the financial sector by stress testing banks and collecting and disseminating relevant data. Third, is climate change mitigation and adaptation. The RSF will help to facilitate the country’s transition to renewables, to promote the adoption of climate-sensitive building codes, and to develop and implement disaster risk financing strategies. How will you monitor progress? Calixte Ahokpossi: We will follow the standard review process. RSF reviews will take place concurrently with reviews of the Extended Fund Facility (EFF), which aims to strengthen Seychelles’ macroeconomic stability and policy frameworks and boost inclusive growth. The reviews will assess progress on each RSF reform measure against predetermined targets. In addition, the government will provide updates on its broader climate change agenda. RELATED LINKS Seychelles and the IMF Staff Paper Resilience and Sustainability Trust (RST)