IMF report highlights insufficiency of current AML policies for combating cryptocurrency tax evasion, stressing the need for stricter laws and global cooperation.
Highlighting Points
- IMF report states current AML policies insufficient for addressing crypto tax evasion, emphasizes need for AML provisions covering crypto transactions.
- KYC provisions aid tax authorities in gathering information on crypto transactions, helping identify tax obligations.
- Limitations of AML rules in facilitating effective taxation highlighted; only 20% of tax administrations have direct access to STRs.
- IMF research stresses stricter laws, global cooperation, and robust reporting requirements for effective combat against tax fraud in cryptocurrency industry.
According to a recent report by the International Monetary Fund (IMF), the current anti-money laundering (AML) policies are insufficient when it comes to effectively addressing tax evasion in the cryptocurrency industry. The paper points out that centralized institutions, particularly exchanges, now play a crucial role in cryptocurrency transactions. These institutions have the ability to gather ownership information, making them essential in efforts to obtain third-party data that can be shared with tax authorities. The inclusion of AML provisions covering services related to crypto transactions is vital in this regard.
AML Standards Crucial in the Fight Against Money Laundering
The IMF highlights the importance of AML standards in combating money laundering and assisting tax authorities. These standards include “know your customer” guidelines, the submission of suspicious transaction reports (STRs), and the inclusion of customer information with transactions (referred to as “travel rules”). The United States has applied AML regulations to cryptocurrency transactions since 2013, and the Financial Action Task Force (FATF) published guidance on implementing these requirements in 2015. However, past legislation in the European Union did not cover cryptocurrencies, and an updated regulation aligning with FATF recommendations is currently pending Council approval.
Mngmnt of #MoneyLaundering, #terrorism #financing & #sanction #risks from #customer relationship with nexus to #DigitalAssets– @MAS_sg#cryptocurrencies #Bitcoin #AML #CFT #Fintech #Finserv #Regulation #P2P #Regtech @RAlexJimenez @Damien_CABADI @efipm https://t.co/Ei1ugkgWge pic.twitter.com/xWTYUGu1DE
— Nafis Alam (@nafisalam) July 16, 2023
KYC Provisions Aid Tax Authorities
KYC provisions have proven invaluable in serving notices to crypto brokers, allowing tax authorities to gather information on taxpayers involved in cryptocurrency transactions. In the United States, the Internal Revenue Service (IRS) has utilized KYC rules to collect data on US taxpayers involved in transactions exceeding $20,000. Similarly, HM Revenue and Customs (HMRC) in the UK have used KYC rules to inform and remind crypto owners of their tax obligations. Recognizing tax crimes as a predicate offense for money laundering enables tax authorities to access the information collected by financial institutions under AML rules. However, AML rules alone are often insufficient from a tax perspective.
Limitations of AML Rules
The IMF report highlights the limitations of AML rules in facilitating effective taxation in the cryptocurrency industry. Only 20% of surveyed tax administrations have direct access to suspicious transaction reports (STRs), and some jurisdictions do not comply with FATF guidelines on sharing tax-relevant information. Tax authorities aim to establish direct and automatic sharing of information on crypto transactions, similar to traditional financial transactions. However, applying reporting rules to domestic institutions may lead to transactions shifting to mechanisms not subject to these rules or foreign exchanges that do not share information with domestic tax authorities. The OECD has proposed a framework for cross-border exchange of information on crypto transactions, which could be built upon by member states.
Tax administrations currently have limited directly usable data on crypto ownership and transactions. To gain insights into blockchain topologies, users can utilize publicly accessible data and forensic analysis tools. Additionally, artificial intelligence technologies and conventional investigative techniques can be used to identify potentially tax-relevant behaviors and establish connections with data collected from sources outside the blockchain. Tax authorities can also employ measures such as taxpayer education and targeted nudges to encourage self-reporting. Large-scale actions and seizures can serve as deterrents, demonstrating that authorities can uncover sophisticated tax evasion schemes.
To effectively combat tax fraud in the cryptocurrency industry, the IMF research underscores the importance of stricter laws and global cooperation. By addressing the shortcomings of AML rules, implementing robust reporting requirements, and promoting cross-border information exchange, tax authorities can uphold the integrity of tax systems in the evolving landscape of cryptocurrencies.
