Crypto’s meteoric rise poses regulatory and taxation challenges worldwide as market value crosses $2 trillion
Tax agencies across the globe are finding themselves increasingly pressed to address the rapid growth of investments in digital assets, an asset class that remains unfamiliar to many. With cryptocurrency’s market capitalization now surpassing $2 trillion, the presence of digital currencies is forcing tax authorities to adapt traditional approaches designed for property, bonds, stocks, and other conventional financial products.
“Investments in cryptocurrencies are no longer insignificant, and we cannot ignore them,” said Oktavia Weidmann, a UK-based tax specialist in cryptocurrencies and derivatives, speaking at the International Fiscal Association’s annual congress in Cape Town. Weidmann emphasized that digital assets are reshaping financial landscapes, particularly as younger generations redefine how they generate, store, and spend their wealth.
Generational Wealth Shift and Crypto Adoption
Weidmann highlighted that this shift is largely generational, with younger investors showing a strong preference for digital assets over traditional avenues such as property and shares. “The younger generation is not interested in shares, bonds, and property. They travel the world, compete in e-sports, and make money from buying and selling non-fungible tokens (NFTs) and in-game items,” she said, adding that the market for in-game assets alone now totals $50 billion annually.
Beyond NFTs and in-game items, younger investors are also turning to cryptocurrencies like Bitcoin. This growing interest has spurred the rise of crypto-based financial products such as exchange-traded funds (ETFs) and derivatives. The crypto derivatives sector now accounts for 70% of the entire crypto market, with crypto ETFs managing assets valued at $60 billion.
Challenges in Taxing Digital Assets
While digital assets continue their meteoric rise, tax authorities are struggling to adjust. Traditional tax frameworks were designed with tangible assets in mind, leaving many challenges in adapting these frameworks to handle the unique characteristics of digital investments. Weidmann identified three main issues in taxing crypto assets:
- Liquidity and Traceability: Unlike other assets, cryptocurrencies are highly liquid and can be challenging to trace. Many taxpayers store their crypto holdings on platforms based overseas, such as in the Seychelles, making it difficult for tax agencies to access information on residents’ holdings.
- Lack of Physical Manifestation: Cryptocurrencies exist only in digital form, presenting an obstacle for tax authorities attempting to ascertain the location and value of these assets. In the UK, tax authorities base crypto taxation on the residency of the beneficial owner rather than on the asset’s physical location.
- Unrealized Gains and Cross-Border Taxation: Cryptocurrencies raise questions about unrealized gains and exit taxes for people moving between countries. Weidmann noted that tax authorities are still grappling with these issues, which remain unsettled in many jurisdictions.
Despite these complexities, tax authorities are not backing down. “Many of these issues are not yet settled,” said Weidmann. “However, tax authorities want their cut and there have been some initiatives as they try to get a grip on taxing these assets.”
EU’s Initiative on Crypto Tax Transparency
In response to these challenges, regulatory bodies like the European Union have introduced tax transparency rules specifically for digital assets. Under these rules, cryptocurrency service providers are required to report transactions made by EU-based clients, a step that may assist tax agencies in obtaining accurate data on crypto holdings.
According to Weidmann, educating tax authorities on digital assets is essential for establishing effective and fair tax policies. “It is important to educate tax authorities on this new asset class to ensure that crypto assets will be taxed properly,” she said.
A Balancing Act for Global Tax Agencies
While tax agencies are working to understand and tax the digital, intangible world of cryptocurrency, they continue to rely on established practices for traditional assets. Yet as the global market for digital assets continues to grow, regulatory frameworks will likely need to adapt swiftly to keep pace with these emerging financial products.
The international fiscal landscape is shifting, and tax authorities are facing a critical juncture: either keep up with the unprecedented rise of digital assets or risk being left behind in an increasingly digitized financial world.
