On 12 October 2020 the OECD released a report on taxing virtual currencies that was prepared for the meeting of G20 Finance Ministers. The report looks at the tax treatment of virtual currencies, considering income tax, consumption tax and property tax.
Challenges to tax policy can arise from some of the characteristics of virtual currencies such as the lack of centralised control; anonymity; valuation difficulties and their hybrid characteristics, such as their possession of aspects of financial instruments and intangible assets. Challenges also arise from the rapid development of the currencies and their underpinning technology.
Policymakers may consider providing guidance on how virtual currencies fit within the existing tax framework. A definition of virtual currencies in national tax law would also be useful.
Guidance may also address the significant taxable events and forms of income associated with virtual currencies. These events include the creation of virtual currencies and related expenses; exchange with other virtual currencies, fiat currency or goods and services and the methods of valuation required; disposal, loss or theft; emerging developments; and related services. The guidance could include other forms of crypto-assets such as utility tokens and how they are to be treated for tax purposes. Guidance should be regularly reviewed to ensure its continuing relevance as technology develops and new asset-types emerge.
The tax treatment of virtual currencies needs to be consistent with the tax treatment of other assets, except where this is not possible due to particular characteristics of virtual currencies. Consistency can increase the neutrality of the tax system. Consistency with the broader regulatory framework is also desirable.
Tax policy must support improved compliance in this area. Compliance costs could be high due to features of virtual currencies such as their fast-moving values; differing exchange rates for the same virtual currency; and the need to keep complex records of details of transactions such as monetary flows and relevant dates. Consideration could be given to supporting taxpayers with compliance, including provision of simplified tax treatment for occasional or small traders.
The tax treatment of virtual currencies should preferably be aligned with other policy objectives. With the decline in the use of cash, some governments are considering how best to support cashless or electronic payments, such as the development of Central Bank digital currencies. Consideration could also be given to whether the tax treatment of virtual currencies is consistent with countries’ environmental policy objectives. Some aspects of the use of virtual currencies such as the commonly-used proof of work consensus mechanism require large amounts of computing power this can have consequences for the environment.
