Crypto taxes
Adobe Stock / Natee Meepian

According to recent research by Swedish tax firm Divly, the number of people reporting their cryptocurrency investment earnings in their taxes is a meager 0.53% of investors worldwide.

A Sobering Reality: Cryptocurrency Tax Compliance at a Glance

In a comprehensive study that evaluated tax payment rates for various countries, it was revealed that an overwhelming majority of cryptocurrency investors failed to declare their activities to local tax authorities in 2022.

While the global tax compliance rate remains low, there is a notable disparity among countries.

One fact that could contribute to the gap between countries is that enforcement strategies employed by governments can influence tax compliance rates. Some authorities have been more proactive in pursuing crypto taxation, while others lag behind.

Finland tops the charts with the highest tax compliance rate of 4.09%, followed by Japan at a rate of 2.18%, which can be partially attributed to the Japanese government and the Japanese Cryptoasset Business Association’s efforts to simplify the tax calculation and declaration process.

Although the United States is ranked 10th, the sheer number of crypto investors, 46 million U.S. citizens, and widespread adoption of digital assets means that the country has the highest number of tax declarations involving cryptocurrency.

The United Kingdom, Australia, and Germany also feature among the top five countries with the highest number of crypto tax declarations.

Countries like the Philippines, where regulations are poorly defined, have much lower compliance rates.

The Factors Influencing Tax Compliance Rates in Cryptocurrency

The variations in tax compliance rates among countries can be attributed to several factors:

  • Public awareness: The knowledge of reporting requirements for cryptocurrencies varies between countries, with some investors being unaware of their tax obligations.
  • Tax payment rates outside of cryptocurrencies: Crypto tax compliance is not the only area with global differences; general tax compliance also varies among nations.
  • Government policies and attitudes: The approach taken by governments toward cryptocurrencies may influence crypto tax compliance. Countries with comprehensive tax reporting requirements for digital assets could encourage higher compliance.
  • Tax implications of owning cryptocurrency: While holding cryptocurrencies is not typically taxed, most countries require traders to pay taxes on profits. However, certain countries like Norway mandate that citizens report their crypto holdings for wealth tax purposes.
  • The difficulty of calculating cryptocurrency taxes: Although cryptocurrency tax calculators have emerged in recent years, many countries still lack adequate software support. Tax calculators focusing on major markets like the United States, Japan, and Germany have made tax payments more accessible for their crypto users.
  • Government enforcement: Some authorities have been more proactive in enforcing crypto taxation, which can influence compliance rates.

Examining Earlier Data on Crypto Tax Compliance

Comparing current tax compliance rates to those in the past can provide valuable insights into the evolving nature of the cryptocurrency market.

In 2015, less than 900 US citizens declared their cryptocurrencies to the IRS, despite over 5.9 million active Coinbase accounts. By 2018, Credit Karma reported that 0.04% of tax filings made through their service contained crypto declarations. Fast forward to 2022, and the compliance rate in the US has doubled since 2018, reaching 1.62%.

As governments implement new regulations and seek improved enforcement, the landscape of cryptocurrency taxation is likely to change rapidly.

India, for example, has just released cryptocurrency tax regulations on March 2023, which should encourage traders to declare their assets.

Additionally, changes proposed on January 2023 to the Directive on Administrative Cooperation (DAC) by the European Union would require cryptocurrency exchanges to share data with local governments, empowering tax authorities with the knowledge of who owes taxes.

While many traders have managed to avoid declaring their cryptocurrencies thus far, the chances of escaping the taxman’s gaze are diminishing. As more countries introduce well-defined regulations and penalties for non-compliance, investors who fail to declare their digital assets may face fines or legal consequences.

As the cryptocurrency market continues to grow and attract new investors, the challenge of ensuring tax compliance on a global scale will only intensify.

Several elements contribute to the differences in tax compliance rates for cryptocurrencies across countries. Public awareness of reporting requirements, government policies, and the ease of calculating cryptocurrency taxes all play a role in shaping investor behavior.

A Call to Action for Cryptocurrency Investors

As tax authorities worldwide continue to bolster their enforcement strategies and implement new regulations, the importance of tax compliance in the cryptocurrency market cannot be overstated.

In the end, it is the responsibility of each investor to navigate the complex world of cryptocurrency tax compliance.

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