WORKING PAPER SERIES

Taxing Cryptocurrencies

Katherine Baer (International Monetary Fund)
Ruud De Mooij (International Monetary Fund)
Shafik Hebous (International Monetary Fund)
Michael Keen (Tokyo College, The University of Tokyo)
March 29, 2023
TC-E-22-1

Tokyo College, The University of Tokyo

TC-E-21-1

Taxing Cryptocurrencies*
Katherine Baer,† Ruud De Mooij,‡ Shafik Hebous§ and Michael Keen¶
Version of March 29, 2023

Abstract
Policymakers are struggling to accommodate cryptocurrencies within tax systems not designed
to handle them; this paper reviews the issues that arise. The greatest challenges are for implementation: crypto’s quasi-anonymity is an inherent obstacle to third-party reporting. Design
problems arise from crytocurrencies’ dual nature as investment assets and means of payment:
more straightforward is a compelling case for corrective taxation of carbon-intensive mining.
Ownership is highly concentrated at the top, but many crypto investors have only moderate
incomes. The capital gains tax revenue at stake worldwide may be in the tens of billions ofdollars, but the more profound risks may ultimately be for VAT/sales taxes.
Keywords: Cryptocurrency, Virtual Assets, Tax Evasion, Tax Compliance, Bitcoin
JEL Classification: E62, H25, H32* We are grateful for helpful comments from Reuven Avi-Yonah, Joel Slemrod, Finn Tarp, Christophe Waerzeggers,
the referee, participants in the conference for this issue and, the discussant of this paper, Alexander Teytelboym. The
views expressed here are those of the authors and not necessarily those of the IMF, its Executive Board, or management.
† International Monetary Fund, kbaer@imf.org‡ International Monetary Fund, rdemooij@imf.org§ International Monetary Fund, shebous@imf.org¶ Tokyo College, University of Tokyo; CERDI; Institute for Fiscal Studies; Centre for Business Taxation,
michael.keen@mail.u-tokyo.ac11Introduction

The rise to a contentious prominence of cryptoassets has been frenetic, and the pace of innovation
involved remains dizzying. From zero in 2008, the market value of crypto assets peaked (so far) ataround USD 3 trillion in November 2021 (Figure 1); and from Bitcoin, introduced in 2009, has now
sprung several thousand other cryptocurrencies. On some estimates, perhaps 20 percent of the adult
population in the US1 and 10 percent of that in the UK2 hold or have held some cryptoassets. Useelsewhere is perhaps even more marked, including in some emerging and developing economies:
the number of global users has been put at more than 400 million. These developments need to be
kept in some perspective: that USD 3 trillion, for instance, was only around 3 percent of the global
value of equities. But the power of developments in crypto assets to disrupt traditional ways of
doing financial business, including the collection of tax—and their potential to do more—has been
made clear.
To some, these developments presage a brave new world in which people are liberated fromoversight by government and reliance on financial institutions, placing their trust instead in
cryptographically-protected distributed ledgers, and transactions costs are ultimately greatly reduced. And, beyond this, crypto is the harbinger of wider innovation in the form of decentralized
finance that will extend these benefits throughout the financial system. To others, these developments have made crypto markets a ‘Wild West’ 3 in which criminal activities are facilitated andpoorly informed investors exposed to massive price swings (the USD 3 trillion has now fallen toless than USD 1 trillion), bankruptcies, scams and frauds (epitomized by the demise of FTX—an
exchange platform that also issued its own cryptocurrency—in November 2022). The deepest
scam of all, to critics, is that all this is on the basis of assets whose creation creates significant
environmental damage and in many cases have no intrinsic value. In response, advocates might
point to the emergence of ‘green cryptocurrencies’, note that fiat currency also has no intrinsic
value, argue that crypto has shown its potential superiority in speed and ease of transactions in the
support provided to Ukraine and assert unknowable benefits from continued innovation.
Regulators face a daunting task in identifying and striking a balance between enabling innovation while securing financial stability and investor protection. For tax authorities, the first-ordertask is ultimately more mundane, if no easier and no less important: to encompass developmentsin the use of crypto assets into a well-functioning tax system. Though its importance will differ,
1 Figures for the U.S. are from surveys whose disinterestedness and quality are not always clear, and orders ofmagnitude vary widely: towards the low end, InsiderIntelligence (2022) puts at 13 percent the proportion of crypto
holders at end 2022; at the high end, MotleyFool (2022) reports 56 percent as holding or having held crypto May 2022.
2 HMRC (2022a).
3 Gary Gensler, chair of the US Securities and Exchange Commission.

2

Figure 1: Market Capitalization of Cryptocurrencies (Aggregate and Selected Currencies)

Total

Bitcoin

Ethereum

Tether

USDC

XRP

3

Trillion USD

2

1

001jan201401jan2016

01jan2018

01jan202001jan2022

Note: The chart shows the total market capitalization of all cryptocurrencies and of five selected ones. Data arefrom Coinmetrics. In 2014, Bitcoin comprised 95 percent of market capitalization of all cryptocurrencies. As of
November 2022, Bitcoin (40 percent) and Ethereum (19.5 percent) are the top two cryptocurrencies in terms market
capitalization, followed by Tether (7.4 percent). XRP is a cryptocurrency associated with a payment settlement
system for financial institutions.

that task will remain whatever the future holds for crypto: whether crypto withers or blossoms, thetax system still needs to deal with it.
This paper aims to provide an overview of the issues that the emergence of and likely developments in crypto assets raise for tax design and implementation, with an eye to the implications forthe taxation of the rich that is the focus of this issue. The aim is not to provide policy prescriptions,but to set the scene within which decisions must be made and highlight the issues they will need toaddress.
The challenge for tax policy and design—beyond that of coming to terms with what remains
for many a complex and baffling set of instruments—is simply stated but fundamental: tax systems
were not designed for a world in which assets could be traded, and transactions completed, inanything other than national currencies. Incorporating that possibility, however, is more than justa matter of expanding legal definitions (important though in some cases that is). The element ofanonymity inherent in crypto assets raises issues of enforcement that have long been associatedwith the use of cash. Those in turn raises issues for the coherence in the taxation of capitalincome (viewing crypto assets as a form of property) and—less noted, but perhaps ultimately moresignificant—in the taxation of final sales under the VAT and similar taxes (viewing them as a formof currency). Questions also arise as to whether taxation might also have some corrective role toplay, complementing regulatory interventions.

3Among the most prominent tax concerns, however—and the rationale for a contribution on
this topic in the present collection—is the presumption, or suspicion, that crypto assets provide
a new and important way for the rich, criminal and other, to evade or avoid taxation. Certainly,
crypto has made some people very rich, with, for example, 19 “crypto billionaires” making it to theForbes List of April 2022.4 Beyond that, while some of the notably rich visibly recoil from crypto,5a loosely defined sense that much wealth channeled into crypto escapes proper taxation appears tohave become part of the wider mood of dissatisfaction around the taxation of the rich. The concern
may have eased since the continuing crypto crash. Auer et al. (2022), for instance, suggest that75 percent of users have lost money on their Bitcoin investments (which raises its own tax issues
around the treatment of losses). How developments in crypto might and should affect the taxationof the rich are among the most important of the challenges they pose—–though, as will be seen, tolarge extent inseparable from still deeper ones.
As well as the challenges there are also real opportunities for tax authorities in the innovations
underlying crypto assets. The distributed ledger technology on which they rest, of which blockchain
is the most important, is remarkably transparent in the information they contain on the history oftransactions, which might ultimately prove valuable for tax administration; and the use of smart
contracts (self-executing programs) within blockchains, for example, might in principle help securechains of VAT compliance and enforce withholding. The focus here, however, is entirely on the tax
challenges associated with crypto assets themselves.
In identifying and taking stock of these, there is relatively little analytical work or empiricalevidence to draw on. Within the burgeoning literature on crypto, tax aspects have received relatively
little attention. There are compendia on the tax treatment of crypto in various countries,6 with auseful overview in OECD (2020). And while vast amounts of data are in principle available ontransactions in cryptocurrencies, empirical analysis around a complex technology whose central
purpose is to leave no tracks is inherently difficult. Experience is accumulating, surveys (doubtlessof variable quality) are proliferating, and, importantly, harder evidence emerging from blockchain
analytics. The reality, nonetheless, is that this is a technically difficult area in which policymakers
need to act on severely limited information.
To set the scene, the paper first reviews key elements of crypto technologies (with some details
and terminology of the mechanics in an appendix) the ways in which they are traded and used, andby whom. Section 3 takes up crypto-related issues of tax design. Section 4 focuses on the scope for
4 Forbes (2022). The richest was FTX founder Sam Bankman-Fried, with an estimated net worth a the time of USD 8.7

billion.
5Warren Buffett, most famously, said he would not pay USD 25 for all the Bitcoin in the world (CNBC, 2018).
6 Such as PwC (2021).

4

tax evasion that cryptocurrencies offer, and Section 5 turns to the critical issue of tax enforcement.
Section 6 concludes.

2

Context

This section provides background on the nature and use of the cryptocurrencies that are the mainconcern of the paper, and on their importance in the taxation of the rich.

2.1

The Nature of crypto assets

By ‘crypto asset’ is meant here7 a “digital representation of value that relies on a cryptographicallysecured distributed ledger...to validate and secure transactions”. This produces, without any needfor a central authority, a presumptively tamper-free record of transactions in that asset. Categorizing
assets within this very wide class in terms of their function—key for their characterizations for tax
purposes—is made difficult by both continued innovation and the multiple services that particularassets can provide. That said, one key tax-relevant dimension along which they vary is between
their use for investment purposes and as a means of payment:• At one extreme are ‘security tokens’, which are essentially digital representations of conventional financial or other assets. ‘Non-fungible tokens’ (NFTs), for example, are cryptographically protected representations of unique assets, such as works of art.8• At the other are the central bank digital currencies (CBDCs), which are essentially fiat currency
in digital form. Many national governments remain highly cautious on their adoption,9 but—noting in particular the experiment now underway in China—the general expectation appears
to be that, in time, the issuance of CBDCs will become widespread.
Conceptually, the appropriate tax treatment of each of these is straightforward. NFTs are naturally
treated as investment assets (though issues of implementation much like those discussed below
arise). CBDCs would simply be another form of fiat currency, and so naturally treated as that
now is. Depending on their design, CBDCs might have other implications for the tax system: theymight, for example, enable tracking of transactions in ways useful for tax administration, or even
7 Precise definitions and classifications in the crypto area vary. That which follows is from OECD (2022).
8 Sothebys, one of the largest multinational art brokers, for instance, is reported to have sold USD 100 million of NFTs
in 2021 (Bloomberg, 2021).
9A few, however, have already issued CBDCs (in the Bahamas and Nigeria, for example), though it seems with only
modest impact.

5the levying of some form of withholding.10 That, however, is not the concern here. In what follows
we set aside both these categories of cryptoasset.
The focus instead is on crypto assets that potentially serve both an investment and a settlement
function, and are privately issued. We refer to these as ’cryptocurrencies’.11 They are also (for now
at least) by far the most prevalent form of cryptoasset.12 The essential mechanics of their operation
are summarized in an appendix. Prominent examples include:• Stablecoins, which are crypto assets that aim to maintain a stable value relative to somespecified asset or pool of assets,13 generally currency(ies), either through some degree ofbacking in the underlying asset or by algorithimc methods regulating supply. The mostprominent are Tether and USDC, both linked to the US dollar.
The primary purpose of stablecoins is to serve as a means of payment, and they would
be naturally treated as such for tax purposes if they were to achieve the intended stability
with probability one. In practice, however, holders are exposed to significant valuation risk,
epitomized by the collapse of Terra in May 2022.14• Bitcoin, Ethereum, and similar assets that, while their supply may ultimately be limited (aswith Bitcoin), have no intrinsic value. These are are sometimes referred to as ‘unbacked
tokens,’ or simply as ’non-stablecoins.’ While Bitcoin, introduced in 2009, remains the best
known and still has the largest share of the crypto market (Figure 1), there are now several
thousand alternatives, taking somewhat different forms: Bitcoin operates by proof of work, forexample, while Ethereum now works by proof of stake and can incorporate smart contracts;’privacy coins’ offer enhanced anonymity of various kinds; and some cryptocurrencies provide
assurances on the greenness of the underlying mining process. Bitcoin is legal tender in (only)
El Salvador and the Central African Republic.
It is this intermediate class of assets, and especially non-stable coins, that are the focus here.15 It isthese that raise the most challenging issues of tax design and implementation, combining as they do
10 See Sarfo (2022).
11Also sometimes referred to as ‘virtual currencies’. In the US, the IRS defines cryptocurrency as “a digital representa-tion of value that functions as a medium of exchange, a unit of account, and/or a store of value.”
12 Security tokens have a total market capitalization of around USD 19 billion, far less than the trillions in which
cyptocurenceies are measured.
13 This definition follows IMF (2023).
14 Only 6 percent of the liabilities of Tether, for example, are backed by cash (IMF, 2023).
15A detailed account of tax issues around stablecoins is provided by Waerzeggers et al. (forthcoming). Other forms ofcrypto assets not considered here include, for example, Initial Coin Offerings, which are crypto assets issued to provide
traditional finance, acquired by investors either for resale or to access services of the issuer.

6Figure 2: Prices and Volatility of Cryptocurrencies

Prices of Top 3 Cryptocurrencies

Thousand USD

Bitcoin

Ethereum

Volatility (Coefficient of Variation)

TetherBitcoin

75

1

60

.8

45

.6

30

.4

15

.2

Ethereum

Tether

2016

2018

SPGCI

SP500

0

0
01jan2015

01jan201701jan201901jan2021

2014

01mar2023

2020

2022

Note: The left panel shows the price of 1 unit of a cryptocurrency per US$; Tether aims to maintain it value at 1US$.
The right panel shows the coefficient of variation of the three series of prices and, for reference, of the S&P GSCI (acomposite index of commodity sector returns) and the S&P500 (stock market index). Underlying data are from Data
are from Coinmetrics, S&P, and FRED.

elements of currency and investment asset.16 They have been marked too by extensive/notorious
price volatility (Figure 2), which creates its own complications in considering their proper tax
treatment. The figure also shows that price variability is by no means zero for stablecoins.
The central feature of cryptocurrencies is that, like cash, their use or ownership does not
intrinsically reveal the personal or business identity of those involved in a transaction. Holders
exercise control through a private ‘key’ (or address), held in a ‘wallet,’ but transactions reveal (atmost) only a public address from which it is encrypted, and from which it cannot be inferred. Private
addresses are not, in case, inherently linked to identifiable beneficial owners; and a single user may
have (very) many addresses. In this sense cryptocurrencies are generally ‘quasi-anonymous’. (Assomething of an outlier, Monero, which appears to be the leading privacy coin, is fully anonymousin that it conceals even the public addresses of those involved in a transaction). Indeed thecreation of difficulty in identifying beneficial owners is one of the primary motivations for thedevelopment of crypto assets. It poses obvious problems for tax enforcement, as well as—perhaps
more important, in the broader scheme of things—for countering crime, money laundering and thefinancing of terrorism.
A second important feature of cryptocurrencies is that, unlike cash, they are remarkably transparent in the sense that these and other details of all transactions on a particular coin are publicly
available.17 This has enabled the development of sophisticated techniques of cryptoanalytics to
16We do not examine the tax issues—or the considerable fiscal risks, emphasized by IMF (2023), that arise if cyrptocur-

rency accepted as legal tender.
17 See for instance https://www.blockchain.com/explorer

7analyse patterns of activity and links between participants.
While it appears effectively impossible to recover private addresses from information provided
in crypto transactions, the general view seems to be that with sufficient effort IP addresses canoften be traced. Again, however, this conveys only limited clues on beneficial ownership, andcan be concealed by use of VPN. Seizures are nonetheless made. In June 2022, for example, theUS Department of Justice seized USD 2.3 million of Bitcoins that it assessed to have been paid ina ransomware attack, presumably—though, unsurprisingly, the FBI chose to leave this unclear—obtaining the private key by traditional investigative methods.18 What several papers do show canbe done with some confidence, as will be seen, is to cluster public addresses by the likely nature of
their holders: to identify those likely held by exchanges for example, or those likely held by miners,
those involved in ransomware attacks, or those likely having close connection with the darknet.
A third feature of cryptocurrencies that amplifies the difficulties posed by anonymity is their
extra-territoriality: transactions reveal no information on the jurisdictional location of those transacting. The ease with which cryptocurrencies can be transacted across national borders immediately
casts the tax issue as in part one of international cooperation and coordination, with an evident
incentive to locate associated activities where tax (and/or regulatory burdens) are light: FTX, forexample, was headquartered in the Bahamas.

2.2

Trading in and Using Cryptocurrencies

There are broadly three ways in which cryptocurrencies may be traded. One is directly peer-to-peer,
without the involvement of any third party. The second is through decentralized exchanges,19
whose purpose is to facilitate such peer-to-peer trades, with customers retaining custody of theirprivate keys. The third is through centralized exchanges,20 which generally hold their customers’
private keys and make transactions on their behalf, charging a commission or fee for doing so.
(In this case, as with FTX, the exchange may act much like a bank in trading the crypto it holds,
making it potentially vulnerable to a run). Transactions in centralized exchanges may be “off thechain” in the sense that they are not recorded within the blockchain, the purpose being to avoid
potentially sizable transactions costs21 (by for instance, swapping private keys instead).
Cryptocurrencies are not yet widely used to purchase goods and services. Press reports suggest
18 Department of Justice (2022b) simply states that: “by reviewing the Bitcoin public ledger, law enforcement wasable to track multiple transfers of Bitcoin [representing]...the proceeds of the victim’s ransom payment, [that] had beentransferred to a specific address, for which the FBI has the private key.” Other seizures, to 2017, are listed in the Annex A
of Foley et al. (2019).
19 Such as Uniswap (v3) and dYdX.
20 Such as Binance and Coinbase.
21 For example, Bitcoin fees averaged USD 2.72 per transaction over the past three years; at a median value of Bitcointransactions of USD 93.61, this implies a transaction fee of almost 3 percent. At times, the fee has reached USD 60.

8that around 15,000 firms globally (400 of them in California) accept Bitcoin and in some cases othercryptocurrencies, including a few household names (such as Overstock.com, Sothebys, Whole
Foods and Microsoft).22 Information on the extent of actual usage is hard, though it clearly does
happen: the crypto analytics firm Chainalysis (undated) reports puts such spending at around
USD 15 million per day in early 2021, tiny relative to a daily total of retail sales in the U.S. ofaround USD 550 billion;23 one survey suggests that in 2021 about 2 percent of Americans haveused cryptocurrencies to make purchases or money transfers24 and another, for HMRC (2022a) in
the UK, reports about 4 percent of crypto owners as having received crypto for the provision of
goods and services.25 In El Salvador, where businesses have been required to accept Bitcoin since
September 2021, only around 20 percent in fact do so, and only around 5 percent of all sales arein this form (Alvarez et al., 2022). Unfamiliarity, high transactions costs and volatility all impede
the routine use of crypto to make purchases. Taxation, as will be seen, can also discourage theuse of crytpocurrencies as means of payment. Were these obstacles to fall over time, however, thesituation could clearly change; starting from a base of zero, even the low figures in El Salvador are
not unimpressive.
The use of cryptocurrencies is not only—or even mainly—a matter for advanced economies.
In an index of national penetration produced by Chainalysis,26 the top four are Vietnam, thePhilippines, Ukraine and India, and the only high income countries in the top twenty are theUS (5th ) and the UK (17th ). Of the estimated 420 million users, more than one-third are in India,
with the highest population shares in UAE (28 percent), Vietnam (26 percent) and the US (13percent).27 The reasons for high take up in emerging and developing countries is not clear. Both
Alnasaa et al. (2022) and World Bank (2018) find strong positive correlation between the use of
crytpocurrencies and indicators of corruption. Though that is suggestive of potential shadiness,more benign interpretations see the the use of crypto as a way to escape corrupt practices andgovernments that are untrustworthy in their political and/or economic behavior, and perhaps also
as facilitating remittances often important in lower income countries.28 In absolute terms, however,the US has the largest crypto market (reaching 16.5 percent of global crypto value). 29
22 From Fundera.
23 Figure for aggregate retail from Ycharts.
24 See Box 2 in Board of Governors (2022). Strikingly, the use of cryptocurrencies for transactional purposes was mostprevalent among low-income households and those without bank accounts or credit cards.
25 See Table 8.3 in HMRC (2022a).
26 See Chainanlysis (2022b). This is a composite reflecting five types of crytpocurrency services and giving higher
weight to countries with lower income per capita.
27According to TripleA.
28 That said, Alnasaa et al. (2022) find no significant relationship with remittances or domestic inflation rate whencontrolling for governance.
29 The US is also the top crypto mining country (37.8 percent), followed by China (21 percent) and Kazakhstan (13.2

9

2.3

Cryptocurrencies, the Rich, and the Not-so Rich

There are those who have made (and lost) large fortunes from the development of crypto assets
and markets. Forbes (2022) lists 19 ‘crypto billionaires’, a noted above, with four among its listof the world’s wealthiest 400 people in 2021 (though that was down from seven in 2019).30 How
much of their wealth is tied up in crypto assets, however—and so poses problems distinct fromthose already familiar in taxing the super-rich—is unclear. Harder evidence on those made richby investing in cryprocurrencies comes from Hoopes et al. (2022), who identify all crypto sales
in the universe of tax returns in the U.S. between 2013 and 2020, the limitation being that thisreveals only those among the compliant who chose not to continually defer realization. They find
1,245 ‘crypto millionaires’31 with evidence too that while ”at least some low-income taxpayers[experienced] life-challenging levels of income via cryptocurency investments” many of them werealready wealthy.32
There are also those who, while deriving their wealth from other sources, are invested in
crypto assets. One survey—conducted at the crypto peak in November 2021—suggests that about
two-thirds of all Americans with net worth of more than USD 1 million hold some cryptocurrency;
and of these, a striking two-thirds hold more than half their wealth in this form.33 Another survey
suggests that in early 2021 there may have been around 100,000 Americans holding more than USD
1 million in crypto assets.34
Holdings, moreover, appear to be extremely concentrated. The top 116 addresses, for example,
own nearly 16 percent of all Bitcoins. The link between addresses and individuals, however,is not one-to-one: addresses are held by corporations and intermediaries; they may be jointly
owned; and an individual may well hold more than one address.35 Makarov and Schoar (2021) use
algorithms that exploit trading patterns of Bitcoin addresses to distinguish between intermediaries
and individual investors. They estimate that the largest 0.01 percent of individual holders (a totalof 10,000) controlled around 5 million Bitcoins, or one quarter of the total outstanding. This is farlarger than the comparable share of equity holdings (and it might even be more concentrated ifsome of these individuals control more than one address).
The apparent propensity of the wealthy to hold significant amounts of cryptocurrency, andthe high concentration of holdings (which implies that many are sizable) means that real issues
percent): Cambridge Bitcoin Electricity Index.
30 Forbes (2021).
31 Meaning those with cumulative reported gains on cryptocurrency of USD 1 million or more over this period.
32 Their average wage income was over USD 360,000.
33 MotleyFool (2021).
34 CBS (2021).
35 bitinfocharts.com

10

of equity and perhaps revenue are at stake in securing their appropriate taxation for income,inheritance and wealth taxation—including, not least, the treatment of losses.
It is also important, however, to remember that it is by no means only the wealthy who holdcrypto assets: in the US, survey evidence suggests that 30 percent of holders have annual income
below USD 50,000;36 Hoopes et al. (2022) find even greater prominence of those on lower incomes:
over half have taxable income of less than USD 40,000. For the UK, HMRC (2022a) finds that 85
percent of crytpo holders have income below £50,000.

3

Cryptocurrencies and Tax Design

This section considers the key questions of policy that arise in framing and assessing the tax
treatment of cryptocurrencies, deferring until later the issues of administration with which theyintersect. Following the chain of events through transactions in and the creation of cryptocurrency(Figure 3), issues arise in relation to both income taxation and VAT/sales taxes;37 there may also be
scope for purely corrective taxation. Countries’ current practices in these areas are diverse, in manycases await clarification, and are generally in a state of flux.38
The natural principle to apply in approaching these design issues—externalities aside, for the
moment—is that of neutrality: taxing cryptocurrencies in the same way as comparable traditional
instruments. For miners, for example, there seems no reason to treat income from fees and thegeneration of new coins differently from other business income, unless some specific (dis)incentive
is intended. Application of neutrality principles to the treatment of cryptocurrencies is madedifficult, however, by their dual nature: as investment assets and as a medium of exchange.

3.1

Income Taxation

Corresponding to these two functions, there are two main ways in which crytocurrencies might
be classified for income tax purposes: as property (like shares, or bonds) or as (foreign) currency.
The implications of the difference will depend on domestic rules, but can be highly material. For
instance, many countries exempt individuals’ capital gains on foreign currencies (Cnossen andJacobs, 2022). Classification as property usually gives rise to capital gains tax, although importantdetail on, for instance, any ring-fencing of losses, exempt amounts and variation of rates withholding periods will be critical. In the US, for example, the characterization of cryptocurrencies
36 Board of Governors (2022).
37 There are of course implications for other taxes, including on wealth, gifts and inheritances, that for brevity we do
not pursue here.
38 For a systematic account, see OECD (2020).

11

as property means that capital gains are in principle reportable on all transactions, with lower
than the ordinary income tax rate applying if held for more than one year; had they instead beencharacterized as currency, gains would be taxable as ordinary income but only on gains over USD
200. Similar difficulties arise elsewhere, with the treatment of cryptocurrencies as property requiring
calculation of gain or loss on every transaction. The obligations this imposes on small users arepotentially extremely burdensome, and a significant obstacle to the routine use of cryptocurrencies
to acquire goods and services.39
There is perhaps a third possibility. Some have drawn analogies between the holding of
cryptocurrencies and gambling, with the apparent implication that is should be taxed in the same
way: see for instance Panetta (2023). This would have implications not only for income taxation but
for VAT and sales tax (with acquisition being treated as a stake), which treat gambling in complex
and diverse ways40 The aptness of the analogy, however, is unclear: about half of respondents
in HMRC (2022a) report holding cryptocurrency “just for fun,” but Hoopes et al. (2022) find thatcryptosellers look much like everyone else in terms of their reported gambling income.
In practice, the most common approach appears to be to treat cryptocurrencies for income tax
purposes as property and subject to the corresponding capital gains tax rules. That still leaves room
for a wide variety of treatments. Several countries, including in Europe, Malaysia, and Singapore,
either do not tax capital gains from financial assets or exempt gains after a rather short holding
period.41 Portugal, which has tried to position itself as crypto-friendly, has specifically exempted
gains on cryptoholdings, though this now applies only to holdings of over one year; El Salvador
still has an outright exemption.42
One special case of note is that of India. There crypto assets are in a regulatory limbo: neither
illegal nor, strictly speaking, legal. Nevertheless, the government has implemented a bespoke tax
regime specifically aimed at taxing at 30 percent gains and/or income from trading in ‘virtual
digital assets’ (VDAs), meaning cryptocurrencies, NFTs and similar tokens, and other assets that it
may specify. This is accompanied by a one percent surcharge on the transfer of any VDA.43
39 See for instance Wiseman (2016), who suggests that users be entitled to self-select as investment or transactional

users (or at least that a de minimis personal exemption be introduced). Waerzeggers et al. (forthcoming) highlight thisdifficulty for stablecoins in particular, given what is clearly their primary purpose of serving as a means of payment, andexplore further the complications associated with the differences between the many types of stablecoin.
40 See for example Clotfelter (2005).
41 Auer and David (forthcoming) find that owners of cryptocurrencies increasingly tend to hold for longer periods.
42Where cryptocurrencies are brought into capital gains tax, the question—partly conceptual, but above all practical—
also arises as to whether the exchange of crypto for other virtual assets should be deemed a realization of gains/losses ora step-up/down in the asset’s base for taxation later upon realization: see Avi-Yonah and Mohanad (2022).
43Above an annual threshold of around USD 600.

12

3.2

VAT and Sales Taxation

The use of cryptocurrencies should pose no great difficulty of principle for the core structure ofthese taxes, since—with barter transactions in mind—these are commonly couched in terms ofsupply being made not for legal tender but for ’consideration,’ a term broad enough to encompass
crypto assets. (Practical difficulties in applying this may well arise, however, some of them touchedon later, from price volatility (which can place particular pressure on verifying precisely whentransactions occur), scope for fraud, and incorporation into cross-border rules). To ensure thatthe acquisition of cryptocurrency for fiat money is not in itself subject to VAT, several countries(including Australia, Japan, and South Africa) provide an explicit VAT exemption;44 in the EU, theCourt of Justice held in 2015 that VAT should not be applied to such transactions.
The VAT treatment of the fees and newly minted cryptocurrencies received by miners also
requires a clear policy stance. In principle, there seems no reason why—again except by way ofcreating a deliberate (dis)incentive45 —these should not be fully liable to VAT, with corresponding
right to credit of VAT charged on inputs. While that is generally recognized as good practice,in practice many VATs exempt fees for financial services. This will result in over-taxation ofbusiness use of cryptocurrency (because of miners’ unrecovered input VAT ) and under-taxation ofindividual use.

44 OECD (2020).
45 The question of whether to allow crediting of electricity costs is taken up below.

13

14
Enforcement
 VAT (selling) Income tax

ReceiverDisposal in $or Different
AssetsMining?

Crypto-for-crypto/virtual
assets Capital gains tax? Capital loss treatment

Policy &Enforcement

Seller in
BTC

 VAT (selling) Income tax

Enforcement

 Income tax (rewards)? VAT (new minted)

 Income tax (rewards)? VAT (new minted)

Note: This diagram illustrates taxable events from the circulation of a cryptocurrency—taken here to be Bitcoin (BTC)—, highlighting their particular tax policy
and administrative challenges. The sender, via miners, purchases a service from the receiver using BTC, and the receiver has the options to either dispose the
BTC or purchase a service with the BTC. A “?” indicates a particular need for policy/legal clarity. Not explicitly depicted here is that these transactions can bepeer-to-peer (P2P), or via decentralized or centralized exchange, which does not affect the policy treatment but affects tax enforcement capability (P2P being mostdifficult, followed by decentralized and finally centralized exchange).

SenderMiningPolicyPolicyFigure 3: An Illustrative Chain of Events)

3.3

Externalities

Several types of externality might be associated with the use of cryptocurrencies, and indeed
these are reflected in the calls in many countries for their more effective regulation and, in some(including China, Egypt, Bolivia, and Bangladesh), the outright prohibition of trading in or mining cryptocurrencies.46 Beyond those externalities conventionally addressed through regulatory
measures aimed at ensuring financial stability,47 protecting consumers, and countering criminality,
however, some may be associated directly with the use of cryptocurrencies themselves.
The analogy with gambling mentioned above, for example, points to possible problems of selfcontrol of a kind that can rationalize corrective taxation. Extensive substitution of cryptocurrencies
for national currencies (‘cryptoization’) might undermine the tools of macroeconomic management,
significantly reducing the effectiveness of monetary policy or capital flow measures—with possible
implications for the functioning of international monetary system. For both problems, the possibility
arises of correction through some form of tax on transactions in cryptocurrencies, akin to thefinancial transactions taxes that have been adopted and even more often proposed for traditional
instruments (including to reduce excessive price volatility),48 of a kind that many also associatewith cryptocurrencies. It might also be that, pending more effective regulation, using the tax
system to discourage trading could in principle serve as a (very) second-best stop-gap device
to counter risks to financial stability and dampen risks to poorly-informed investors. The one
percent transfer tax in India might indeed be seen as a pioneering step addressed to these purposes.
But whatever the conceptual merits of a crypto transactions tax might or not be—and there arecounterarguments in the unknown benefits of fostering innovation in crypto—implementation is
problematic, for reasons similar to those highlighted in Section 5: while national application to thesubset of transactions through centralized domestic exchanges (and/or miners) may be feasible,
this might simply drive transactions into peer-to-peer form or offshore. Similar arguments might
nonetheless warrant less dramatic measures within existing structures, such as denying or limiting
loss offsetting under the capital gains tax.
The most compelling case for feasible corrective taxation, however, is environmental. Proof-ofwork consensus mechanisms (such as that behind Bitcoin) require considerable energy, as they rest
on finding the solution to a complex mathematical problem by making an enormous number ofguesses. The associated carbon emissions are cause for considerable concern: Hebous and Vernon
46 Mining seems, nevertheless, to have lingered in China at least into 2022.
47 Tax design has a role here too, for instance in avoiding biases towards excessive debt finance (Keen, 2011).
48Whether they in fact do so is another matter cut, and likely to depend on market characteristics, such as thickness
and the prevalence of institutional investors. For an overview of the issues around financial transactions taxes, see
Matheson (2012).

15

(forthcoming), for instance, estimate that in 2021 Bitcoin and Ethereum used more electricity thandid Bangladesh or Belgium, generating 0.28 percent of global greenhouse gas emissions.49
Awareness of this is now quite widespread, and reflected in the explicit marketing of somecryptocurrencies as ’green.’ Voluntariness alone, however, is unlikely to provide a complete
solution.50 By the usual arguments, externalities from mining-related carbon emissions are best
addressed within a general carbon tax, which would automatically internalize the costs of theenergy-heavy proof-of-work verification mechanisms. In the absence of a carbon tax, however,there is a case for more targeted tax measures. In March, the Biden administration proposed a 30
percent tax on miners’ electricity use, though (for now at least) with no differentiation to reflect
the carbon-intensity with which it is generated. Kazhakstan (an important location for mining)
introduced a similar tax at the start of 2023, with a reduced rate for those using renewable sources.51
Absent any additional tax of this kind, a less efficient but nonetheless meaningful measure might
be to to limit or deny income tax deductions for energy costs incurred in for their mining activities,
and/or similarly that (if not VAT exempt) there be no credit for input VAT on energy costs.

4

Evasion and Revenue Potential

From their outset, a paramount concern with cryptocurrencies and crypto assets more generally
has been the appeal of their anonymity properties in facilitating criminal activities. And there
is no doubt that their criminal use is extensive, both in the large seizures that have been (thelargest, in February 2022, being of Bitcoin valued at USD 3.6 billion)52 and in the sizable (though
short-lived) price responses to them. It is also suggestive of shadiness that has long surrounded
crypto that there is a strong negative cross-country correlation between usage of Bitcoin and various
indicators of institutional quality/control of corruption.53 Specific areas of concern include both‘traditional’ crimes–—money laundering, trade in drugs and other illegal goods and services,financing of terrorism—–and newer ones that draw on similar digital skills, including online
frauds and ransomware attacks. Tax evasion is commonly included in this long list, but, perhaps
49 One might be tempted to argue further that, irrespective of any environment impact, the resources that theseprocedures use are in any case in effect a deadweight cost: the mathematical problem is of no substantive importance,
and is required only to impose a cost that discourages the sending of dishonest messages. Abadi and Brunnermeier(2022) show, however, that some such costs are required if a consensus mechanism is to have desirable properties. Shortof arguing that crypto in itself is inherently worthless, they thus have some value.
50 In September 2022, Ethereum moved to a proof-of-stake mechanism that is far less damaging to the environment,
but there are no signs that Bitcoin and others will abandon the proof-of-work consensus any time soon.
51 By way of context, with shares of 35 and 18 percent respectively, the US and Kazhakstan account for more than halfof all mining; Russia follows at 11 percent.
52 This related to theft from Bitfinex, a cryptocurrency exchange: see Department of Justice (2022b).
53As found for instance in Alnasaa et al. (2022) and World Bank (2018).

16

unsurprisingly, often rather low down. And, indeed, it is easier to get at least some direct handle
on the use of crypto for criminal activity in general than for tax evasion in particular. We consider
each in turn.

4.1

Crime and CryptoMore is known about the use of crypto for what may be more serious crimes than its use for tax
evasion. This is because the nature of the technology—with the entire history of transactions on a
blockchain and public keys all public information—turns out to provide meaningful clues as to theextent of hard-core criminal activities.
With data on the universe of (over 600 million) transactions in blockchain from its inception
in 2009 until April 2017, Foley et al. (2019) start by identifying addresses associated with seizures
and trading on the darknet.54 Building on this, they go further and estimate a wider populationof those likely to be engaged in illegal activities, both by building clusters based on trades withthose identified as ‘directly’ illegal and estimation based on their characteristics (such as the useof ‘tumbling’55 and other measures of obfuscation). Their final estimate is that in 2017 around 25
percent of all Bitcoin users were engaged in criminal activity, accounting for around 23 (respectively,
about 17)56 percent of all transactions by number (by value), and holding around half of all Bitcoins.
In dollar terms, this means transactions of USD 76 billion and Bitcoin holdings of USD 7 billion in2017. These are large enough figures to conclude that “a significant component of [Bitcoin’s] value
as a payment system derives from its use in facilitating illegal trade.”57 Chainanlysis, a specialist
crypto analytics firm, arrives at much smaller numbers for the relative scale of illegal activities
enabled by cryptocurrencies. For that same year of 2017, Chainanlysis (2022a) estimates that ‘illicit
addresses’ accounted for around 1.4 percent of all transactions, and received payments of around
USD 4 billion. Makarov and Schoar (2021) arrive at a similarly modest figure, putting illegality andgambling at under 3 percent of the total.
These are very substantial differences. Makarov and Schoar (2021) attribute them largely todifferences in the denominator, with their own estimate, unlike that of Foley et al. (2019), excluding
exchange related and similar transactions, which they see as not being “economically meaningfultransactions:” these account for about 80 percent of total volume. While this helps reconcile thefigures, the implication would nonetheless be that these transactions are a sizable share of Bitcoin
54 For 2017, about 6 percent of all Bitcoin users are placed in this category, accounting for around one-third of alltransactions.
55 Tumbling involves mixing funds from different sources and sending on to distinct addresses; it is intended to maketracking harder.
56 From inspection of their Figure 6B.
57 Foley et al. (2019), p.1802.

17

transactions that relate to real activity.
There is though consensus that while crypto-enabled crime is growing rapidly in absolutevolume and value, it is declining in relative terms.58 It also seems to be agreed, albeit more asserted
than demonstrated, that criminality continues to rely more heavily on traditional financing means,including cash.59
What is also clear is that cryptocurrencies continue to innovate towards increasing anonymity.
Monero, for example, operates on the blockchain but has the feature that public keys, transaction
details and other information are not publicly revealed. These are increasingly seen as the cryptocurrency of choice for serious crime. In response, in 2020, the IRS issued a request for proposals
to enhance capacity to trace transactions on Moreno and other privacy keys.

4.2

Evasion and Crypto

Since the proceeds of illegal activities are generally taxable, estimates of illegality of the kind above
will encompass some degree of tax evasion. For the serious crimes that have been the primary focus
of concern and investigation, however, tax evasion is likely a by-product rather than a primary
motivation; indeed the purpose of the extensive money laundering in cryptocurrency is to makeillegal gains appear legal, and even perhaps consequently subject to some tax.
From the tax perspective, however, three issues are more paramount. The first is the nature of
the incentives to use crypto as a means of evading taxes on what are otherwise legal transactions:the provision of legal goods or services, for example, or payment of salaries. The second is theextent to which cryptocurrencies are, or might be, used to such an end. The third is the extent towhich taxes related to the generation of or trading in crypto assets themselves—earnings frommining, for example, or gains on their sale—are properly paid. Little is firmly known about any ofthese.
On the first question, crypto technologies do not in themselves fundamentally alter the considerations shaping decisions on engaging in tax evasion. Their essence remains as set out in theliterature that begins with Allingham and Sandmo (1972): balancing the tax saved in the event thatevasion succeeds against the losses suffered in the event that it does not, with the likelihood of eachdepending on the probability of detection. In that canonical setting, the distinctive feature of crypto,
arising from its anonymity, is naturally thought of as a particularly low probability of detection andhence particular appeal as a device for evasion. But there may be further considerations entering
58 This was true over the sample period of Foley et al. (2019) (and see also Tasca et al. (2022)); for the period since,

Chainanlysis (2022a) estimate that the amounts flowing to ‘illicit’ addresses have about tripled, to around USD 15 billion,
but the share of transactions to have fallen by 90 percent.
59 See for instance Europol (2021).

18

the evasion calculus.
One is that transactions costs will matter, both as to whether to evade at all and in selecting themeans of doing so. In this respect, where the balance of advantage lies between crypto and, theobvious comparator, cash, is not a priori clear-cut (and may change over time). Crypto may, forexample, offer some savings in transactions costs relative to cash,60 for which existing channels cansometimes be more expensive; the estimated fee for a $200 remittance, for instance, is 5.7 percent
compared to 1.4 percent for a Bitcoin transaction (Beck et al., 2022). But its use and exploitation toenhance anonymity may require skills that costly to acquire. Over time, the latter obstacle to theuse of crypto (leaving any regulatory restrictions aside) will surely decrease.
Another, more distinctive consideration, is the risk implied by the high price volatility ofcryptocurrencies.61 Differentially higher risk of fraud or theft in using cryptocurrencies would have
similar effect. Akin to exchange rate risk, the primary consequence is likely to be to discourage
the use of crypto for evasion purposes. Limiting it may lead risk-averse evaders to cash out more
quickly than those holding for investment purposes, a trait that the studies cited above suggest is
associated with criminal use of crypto.
There is almost no hard evidence, even anecdotal, on the second, quantitative question as tothe extent of crypto-enabled tax evasion. In India, the authorities seized nearly USD one billion inevaded GST from local exchanges in May 2022.62 And, in the UK, HMRC seized crypto assets and
NFTs apparently intended to set up a VAT fraud.63 It is interesting, and perhaps telling, that bothstories relate not to income taxation but to the VAT. Having even less firm evidence on the possible
extent of crypto-related evasion than for more traditional forms, we speculate further in the next
section.
On the third question, there is some information on the converse of evasion: tax paid. For the
U.S., the results of Hoopes et al. (2022) imply that around one percent of all returns in 2020 reported
some sales of crypto. That is well below the 10-20 percent or so of American adults suggested bysurvey evidence to have held crypto around then; but of course some compliers may simply havechosen not to realize. There are also signs of at least some degree of compliance in the UK: a survey
conducted for HMRC (2022a) reports that 45 percent of crypto owners thought they might besubject to capital gains tax, and 34 percent believed that they had a good understanding of the rules.
It also reports that nearly 30 percent of owners had sought their guidance on the tax treatment ofcrypto—most, presumably, intending to comply rather than seeking clues on how to evade. While
60 IMF (2023) is skeptical on this, at least at present, except perhaps for some small cross-border payments of the kindin the example that follows.
61 To a lesser degree, of course, for stablecoins.
62 ITR (2022). Traders in cryptocurrencies are subject to 18 percent GST.
63 See Financial Times and Cointelegraph.

19

that might suggest fairly widespread but far from complete understanding, many holdings wereso small that any gain would almost certainly be below the exempt amount.64 Cluster analysis,
however, identifies only one group (‘A’) as having tax-relevant gains (or losses)—within which,65
90 percent believe they have a good understanding of capital gains tax and 72 percent have seen
HMRC guidance. Knowing one’s tax obligations is not the same, of course, as intending to comply
with them; and it is noticeable that those in Group A are also more likely to trade outside centralizedexchanges, including peer-to-peer, in ways that are harder to monitor. More generally, it seems
unlikely that those determined not to comply will respond to a survey on this topic. While there isthus some comfort in these results, it is far from complete.
Cong et al. (2022) look for signs of tax compliance by exploring the extent to which US-based
crypto owners harvest tax losses around year end; that is, sell crypto and immediately repurchaseso as to realize losses while leaving their holding unchanged—a transaction that would be hard torationalize other than one of tax planning. (For traditional securities, such harvesting is restrictedby disregarding repurchases within 60 days of the sale; as one of the gray areas in the precise detailsof the taxation of crypto, however, this restriction was not believed to apply to crypto.)66 Using
both proprietary data from 500 large retail traders and data from 34 exchanges,67 Cong et al. (2022)
find that such crypto transactions do occur and moreover increase following public statements by
the IRS highlighting tax obligations on crypto transactions and its intention of targeted enforcement
efforts. The conclusions to be drawn from this, however, are somewhat mixed: while there is adegree of compliance, the impact of policy statements by the IRS suggests that, whether willful or
the product of ignorance, there is, or at least has been, a consequential element of non-compliance.

4.3

Revenue Potential

All this leaves little sense as to the amount of revenue at stake, whether for collection or evasion.
Perhaps coming closest to this goal is the work by Thiemann (2021). Using data on Bitcointransactions provided by Chainalysis, linked probabilistically to country of user (by information
on web traffic flows to platforms and other clues such as time difference) this arrives at estimatesof accrued and realized capital gains by EU residents. While information on capital gains tax
actually paid on these transactions is unavailable, this enables rough estimation of the tax due in
64At the time, £12,500. In principle, they might also have gains on other assets.
65 Figures that follow are from HMRC (2022a) (Table 8). Of those in Group A (marked by higher incomes and much
more frequent trading), 64 percent were estimated to have a taxable gain on crypto alone; in the other three groups, thatfigure is no more than one percent.
66 The administration has now made clear its intention to ensure that it will.
67 The latter may be more compelling since, as the authors note, their willingness to provide data may suggest that
traders intend to be broadly compliant.

20

principle—which in turn can be thought of as an upper bound on the amount of tax evaded. And
that amount is put at EUR 850-900 million in 2020. It is hard to scale this relative to revenues fromthe taxation of personal capital gains tax in the EU, which many countries do not report. But, forexample, Thiemann (2021) suggests that this is about 0.3 percent of total property tax revenue inthe EU; and it compares to capital gains tax revenue in the UK alone (not included in the sample)
of about EUR 12 billion.68
Beyond this, so great is the ignorance in this area that even the crudest back-of-envelope
calculations may be helpful. In this spirit, one approach is to treat cryptocurrencies as an investment
asset, and apply some assumed rates of return and of taxation. Suppose, for instance, a total crypto
market capitalization of USD 1 trillion69 (which, for scaling, might be compared, with well-known
estimates that global ”hidden wealth” is around USD 7 trillion).70 Assuming a rate of return of 5
percent—having in mind returns closer to normal than in the past—and a tax rate of 20 percent(brushing aside the complexities and diversity of national tax regimes), the implied total tax due is
USD 10 billion. Taking instead the peak market valuation (in November 2021) of USD 2.6 trillion,
this becomes an annual USD 26 billion.
These may all seem small numbers in the global context* even that latter, for instance,is onlyaround one percent of worldwide revenue from the corporate income tax (CIT). However, while anassumed return of 5 percent may approximate some kind of steady state for cryptocurrencies, there
is little sign of an approach to such normalcy, and, to the contrary, the past has been characterized
by remarkable volatility. Looking back at the past 2 years can illustrate how much revenue has
been at stake. Market capitalization of crypto assets in 2021 went from USD 752 to USD 2,368
billion; in 2022, it dropped to USD 836 billion. These numbers are close approximations of theaccrued capital gain/loss (the volume of Bitcoins, for instance, rose by only 2 percent and these
newly minted Bitcoins would be subject to income tax too). Again assuming a tax rate of 20 percent,the tax revenue from an accrual-based capital gains tax would thus have been a hefty USD 323
billion in 2021, or around 12 percent of global CIT revenue. If one third of these gains were realized,
revenue would still be around USD 100 billion. In 2022, on the other hand, if losses had been
fully offset against other incomes, the reduction in tax revenue loss would have been of a similar
magnitude—although loss offset could also be restricted by ring fencing crypto assets for tax
purposes.
Given the high concentration of holdings noted above, the potential tax on the gains (and offsets
on the losses) of the largest holdings would be correspondingly huge: in 2021, for example, the68 From OECD Revenue Statistics, accessed November 22, 2021; at an exchange rate of £1=€1.2.
69 https://coinmarketcap.com/charts; accessed November 11, 2022.
70 See Zucman (2013) and Alstadsæter et al. (2019).

21

implied tax on the realized gains of those 116 largest addresses would be around USD 17 billion. In
the ‘normal times’ scenario, it would be around USD 1.4 billion.
One might also consider—–not as a recommendation, though nonetheless with the corrective
considerations discussed above in mind—the revenue that would be raised by applying to cryptocurrencies a financial transactions tax of the kind sometimes proposed or applied to trading insecurities. At, for example, the rate of 0.1 percent on securities trading in the still-lingering proposalof the European Commission (2011), revenue, if applied to all crypto transactions, which amounted
to USD 15.8 trillion in 2021,71 would be around USD 15.8 billion.72
An alternative approach is to focus on the use of cryptocurrency as a means of payment. A
difficulty here is that some transactions would in principle be fully taxable (such as purchases ofgoods and services or property by final consumers)73 others (purchases of business inputs, includingsalaries) would be wholly or partly deductible. Even generous allowance for the latter, however,suggests that large amounts could be at stake. Suppose, for example, that all cryptocurrencytransactions were in the form of a VAT chain, with final sales accounting for 5 percent of alltransactions by value. With total transactions of USD 15.8 trillion in 2021, at a VAT/sales tax rate of
15 percent the implied revenue loss would be a massive USD 118.5 billion. It may be, of coursethat many of the current transactions relate to serious crime, and in that sense likely an order ofmagnitude harder to recover than tax on legal activities. But if only 2 percent of transactions were
for legal final sales, the implied revenue would still be a sizable USD 47.4 billion.
These calculations are scandalously simplistic, with more caveats—the assumption, for example,
that tax changes would not affect volumes or values—than are worth listing. And of course,
since some of that potential revenue is presumably already being collected, they do not indicate
how much tax is being evaded. Some sense of that is provided by the estimate of the US Joint
Committee on Taxation (2021) that revenue in the first year of operation of the new crypto reporting
requirements described below—presumably additional to what would have been raised though
self- or other reporting, and perhaps affected by the cumulation of losses since 2021—would be
USD 1.5 billion, rising to USD 4.6 billion in 2031. This is around one percent of total (federal, stateand local) revenue from individual capital gains tax in 2020.
All this does suggest some lessons. One is that the revenue at stake worldwide is plausibly inthe tens of billions of dollars, perhaps even, if cryptocurrencies were to perform strongly, in the
71 Chainanlysis (2022a). Trading volume in 2022 is around 30 percent lower than in 2021.
72At the still lower rate of 0.01118 percent applied to certain transactions in Brazil, it would come to only USD 1.8

billion (KPMG).
73 Use for this purpose may not be trivial: HMRC (2022a), p.6, report 9 percent of crypto owners as having been paid
for work in crypto assets. While, as noted above, only 4 percent indicate having received crypto for the provision of
goods and services; for Group A this rises to a strikingly high 26 percent (HMRC, 2022a, Table 8.3).

22

high tens. How much of that is plausibly recoverable is another matter: even leaving aside theproblems of detecting evasion associated with quasi-anonymity, controlling serious criminality
lies far beyond the reach of tax administrations. A second is that a large part of the revenue atissue relates to large and wealthy holders of cryptocurrencies. And a third is that, in revenue terms,
the use of crypto as a currency for legal transactions rather than for investment purposes mightperhaps become a still greater concern. Much of the attention that has been paid to cryptocurrency
in the tax literature has been around income tax issues; it may be, however, that it is in relation to
VAT and sales taxes that the most significant issues will arise.

5

The Heart of the Matter: Implementation

In any area, a prerequisite for effective and efficient tax enforcement is a clear and complete
statement of the rules to be implemented. Even in some of the most advanced countries, however,some important detail remains unclear.74 Indeed so rapid are developments in the area, and so
hard have they proved to accommodate within pre-existing legislation, that the process of tax rules
reactively trying to catch up with innovations in technology and associated financial operations75
seems likely to continue for some time.

5.1

The Implications of Anonymity

The fundamental obstacle to tax enforcement in relation to cryptocurrencies is the element ofanonymity. The novelty of the problem was nicely expressed by the discussant of this paper(paraphrasing): in the old days, the tax authorities’ problem was that it knew who your were, but
not your income; now the problem is that it knows your income but not who you are.76 Taken
literally, this somewhat misstates the issue: income can be hard to identify from transactions (asamplified later); and it is not simply that the tax authorities cannot identify individuals—nobody
can. Sight must also not be lost of taxes other than on income, not least those on goods and services;
for these, information (potentially very precise) is also needed on the purpose of a transaction.
Nonetheless, the aphorism conveys important element of truth that the use of cryptocurrencies
raises problems not so much in identifying transactions but in linking them with specific entities
of a kind, and in discerning their purpose, of a kind never before faced. Nor is this an accidental
by-product of the development of cryptocurrencies. Their creation has been driven precisely by
74As, for instance, with the issue noted above of whether wash rules in the US apply to cryptocurrencies.
75A recent example is the consultation on the tax issues related to staking and lending crypto assets launched by
HMRC in July 2022 (HMRC, 2022b).
76 The idea, though not quite the same turn of phrase, is in Baronchelli et al. (2022).

23

an intention (whether for libertarian or criminal purposes) to provide ways to undertake financialtransactions without involving either government or any central authority that would be in aposition to provide it with third-party information. With no intrinsic motivation to self-report
crypto transactions (except perhaps when they make a loss), overcoming pseudo-anonymity is thecore problem that tax administrations are now trying to address.
It is worth pausing, however, to reflect on the significance of anonymity for yax implementation.
In itself, anonymity—meaning an inability to link transactions with specific individuals or legal
entities—is not in itself fatal to any form of taxation. A single rate transactions tax requires
no information on taxpayers’ identities; what impedes its anonymous implementation in theblockchain case is an inability of the tax authorities to insert themselves into the chain. Similarly,
implementing a flat rate income tax does not require the identification of taxpayers; it does thoughrequire information, also not available on the blockchain, on the nature of transactions (to pickout, for example, a payment of interest). More complex tax structures (nonlinear income taxes, or
VATs involving both credits and output tax) require some means to identify distinct transactions
with the same individual so as to aggregate over them, including transactions conducted by meansother then cryptocurrencies. In the limit, if all transactions were conducted in cryptocurrencies, andindividuals or firms each had a unique digital identifier, one could conceive of sophisticated tax
systems being implemented, with the use of smart contracts, entirely on the blockchain—and thisin principle would not require the tax authorities to identify the real individuals and firms behindthose identifiers. Privacy in this respect could be fully respected, and, in principle, the dystopian
prospects some see as an ultimate results of CBDCs77 avoided. But whether governments would
abstain from some building in some ability to identify individuals can be doubted.
For the foreseeable future, however, the challenge for tax authorities is the less profound but
deeply challenging one of finding ways to accommodate the pseudo-anonymity of cryptocurrencies
within systems not designed to do so.

5.2

Dealing with Anonymity

The good news for tax authorities, and regulators, is that—contrary to the vision of the original
crypto designers—a core role has emerged for centralized institutions of various kinds in thetransacting of crypto assets, notably exchanges through which they are bought and sold. Such
institutions are in a position to obtain information on ownership, and so are at the core of current
efforts, perhaps somewhat belatedly and certainly still incompletely, to obtain useful third-party
information that can be shared with tax authorities.
77 See for example Baronchelli et al. (2022).

24

The use of intermediaries to either acquire or cash out crypto for fiat currency or other traditional
instruments is a natural point for tax authorities to acquire information. An important step to thisend is ensuring that anti-money laundering (AML) provisions apply to those providing services
relating to transactions in cryptocurrencies. Key AML requirements include ‘know your customer’(KYC) rules to verify identity–—which in a crypto context, should enable linking of private keys
with beneficial owners, at least in centralized exchanges—provide suspicious transaction reports(STRs) and attach customer information to transactions (‘travel rules’). In the US, the applicability totransactions in crypto of AML rules was made clear in 2013, and, more widely, in 2015 FATF78 issued
guidance on the application of established guidelines. At EU level, prior regulations applied only to“banknotes and coins, scriptural money and electronic money”79 and so excluded cryptocurrencies;
a proposal issued by the Commission for an appropriately updated regulation, in line with FATF
guidance, now awaits Council approval. It was KYC provisions that provided the informational
basis upon which the IRS has served ‘John Doe’ notices on crypto brokers seeking information
on US taxpayers transacting USD 20,000 or more in cryptocurrency between 2016 and 2021.80 In
the UK, they enabled HMRC to write targeted letters to crypto owners reminding and informing
them of their obligations.81 Moreover, where ‘tax crimes’ are recognized as a predicate offence formoney laundering, tax authorities in principle have access to the information collected by financial
institutions under AML rules.
In practice, however, AML rules alone are commonly inadequate from a tax perspective (notonly for crypto, but more generally). Not all jurisdictions fully comply with FATF guidelines,82
and even where they do tax administrations may face obstacles in accessing the information
they generate: surveying 28 of its members, OECD (2015) reports that only 20 percent of tax
administrations had direct access to STRs, leaving a heavy reliance on financial intelligence units tospontaneously share information that they deemed potentially tax-relevant. Nor is it any case clearthat even serious tax evasion will trigger STRs. Tax administrations’ access to AML information
may have improved since the OECD survey.83 But extending AML rules to crypto transactions,
important though it is for other purposes, is evidently insufficient for enabling their effective
taxation. KYC rules might enable the authorities to know, for instance, that some individual cashed
out a certain amount of cryptocurrency; but from the transactions prior to that recorded on the
78 The Financial Action Task Force is the international standard setter in AML and countering the financing of terrorism.
79 See EC (2021).
80 Department of Justice (2022a).
81As described, for example, in Saffery.
82As of June 2022, FATF reports more than 20 jurisdictions as under ‘increased monitoring’ (FATF, 2022).
83 OECD (2015) reports 57 percent of surveyed jurisdictions as planning to ease their tax administrations’ access to
STRs.

25

blockchain it will not be possible, without further information, to identify any associated capitalgain or loss.84
Going beyond AML, the natural aspiration for tax administrations is to secure direct andautomatic sharing with them of information on crypto transactions similar to that already quite
widely in place for traditional financial transactions. This is now the focus of considerable attention.
In the US, the Infrastructure Improvement and Jobs Act (IIJA) of November 2021 includes two
relevant provisions, requiring that: (1) A broadly defined set of digital service providers, potentially
including even miners,85 report details of their customers’ transactions to the IRS annually, just as
with bonds and shares: (2) All businesses report transactions in crypto assets of over USD 10,000,
mimicking the pre-existing rule for cash payments. Both provisions take effect from tax year 2023.
Similar measures are being adopted elsewhere. In Brazil, for instance, the Federal Revenue Service
introduced regulations in 2019 requiring legal entities and individuals to report operations carriedout with crypto assets.86
The application of reporting rules to domestic institutions may, however, drive transactions
to either domestic mechanisms not subject to those rules or foreign ones that do not provide
information to the domestic tax authorities. Cong et al. (2022) see signs of the latter effect at workin the US, finding that while IRS actions aimed at US taxpayers in general87 appeared to increase
legal avoidance activity in crypto markets, actions targeted at a specific US exchange (Coinbase)decreased activity on US exchanges.88 In the UK, 22 percent of survey respondents in HMRC
(2022a) indicated that they preferred using foreign exchanges.
The key tool to address this is cross-border exchange of information, with the reporting ofassets and income to the country of residence. Existing frameworks for this, however, were notconstructed with cryptocurrencies, or crypto assets, in mind, so that they risk falling into a grey
area.89 Recognizing the problem, OECD (2022) sets out a framework for cross-border exchange
between tax authorities of information on crypto transactions to parallel that already being applied
84 Innovation around the implementation of KYC rules can also be expected, as with the use of ATMs to acquire or
dispose of cryptocurrencies using credit cards or, leaving even fewer traces, cash. In the UK, the perceived threat issuch that these are illegal; in the US, while they are in principle subject to KYC rules implementation appears to be
problematic ((CNBC2021CashIn).
85 The provision applies to “[A]ny person who (for consideration) is responsible for regularly providing any service
effectuating transfers of digital assets on behalf of another person" (Section 8060).
86 Individuals or legal entities conducting virtual currency operations for amounts exceeding USD 5,548 (30,000 Reais)
on a monthly basis must report this information. Cryptocurrency exchanges domiciled in Brazil for tax purposes mustalso provide information, annually, in relation to each user of their services.
87 Reminding them of their obligations, and announcing a compliance program focused on crypto.
88 Fear of driving trading abroad may be one reason why the reporting requirements of the IIJA do not apply to non-US
taxpayers.
89 In the US, for instance, there is no explicit guidance on which foreign entities active in the crypto area are required toreport under the Foreign Account Tax Compliance (FATCA) requirements.

26

for traditional financial assets and fiat currencies. This presumes that domestic authorities have inplace requirements similar to those above, including for non-residents—–so that implementation is
likely some way off—–but nonetheless provides a setting within which such rules can be developedwith a substantial degree of commonality; the EU, for instance, appears to have been awaiting
the outcome of this OECD work in order to build upon it among the member states. Importantly,
the OECD framework reflects concern with the possible implications of crypto assets not only forincome taxation but also for the VAT and sales taxes more generally: it includes a provision for
the reporting of purchases by crypto assets of goods and services exceeding USD 50,000. General
adoption of provisions along the lines of OECD (2022) remains, however, a somewhat distantprospect. In the (potentially long) meantime, all that entities will need do to avoid information
reporting is ”to have their servers in a country where the authorities are willing to tolerate their
existence.”90 And indeed the experience has been that as some jurisdictions adopt international
standards of information exchange so activity tends to shift to others.91
Effective mechanisms of third-party reporting by centralised institutions involved in trading
cryptocurrences, including across borders, thus remain some way in the future. But it is at least
possible to see how they might work. It is ultimately direct peer-to-peer transactions, including
those facilitated by decentralized exchanges, that pose the toughest problems.
Decentralized exchanges simply could not meet the kind of reporting obligations now imposedin the US, from which, and perhaps for that reason, while not excluded from the reporting requirements of the Infrastructure and Jobs Act, are also not explicitly included.92 The reporting envisaged
by OECD (2022) would include any decentralized exchange “to the extent it exercises control or
sufficient influence over the platform, allowing it to comply with the due diligence and reporting
obligations”93 —which, in most circumstances, it would be unlikely to do. In practical terms, it isextremely hard to assess the extent to which crypto transactions are currently peer-to-peer rather
than through a centralized exchange. FATF, for example, asked seven blockchain analysis to assess
the proportion of Bitcoin transactions conducted peer-to-peer: the estimates varied from close
to zero to nearly 100 percent. In HMRC (2022a), only 8 percent indicated using a decentralizedexchange; among the most tax-relevant and tax-informed Group A, however, the figure rise to
90 Makarov and Schoar (2021).
91As shown, for example, in Johannesen (2014).
92 Decentralized exchanges were explicitly included in early versions of the Infrastructure and Jobs Bill, but in the

final version the obligations apply to those “regularly providing any service effectuating transfers of digital assets onbehalf of another person” (Sec 8606 (a)(2)(D)). Whether ‘effectuating’ is to include the facilitation services provided bydecentralized exchanges will perhaps be clarified in the accompanying regulations, which are still waited. On languagein the priori draft, see Forbes.
93 OECD (2022), para 27, p.51.

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nearly 50 percent.94
Whatever their current importance, however, the concern must be that as information reporting
becomes more effective in relation to centralized trades so activity will shift to decentralized forms
upon such rules cannot realistically be imposed. For these, more innovative methods may beneeded.
One alternative approach, for example, may be to focus on requiring information reportingnot (only) by things that resemble financial institutions but on the miners themselves.95 These are
involved in every cryptocurrency transaction and, moreover—always useful for tax administration(though less welcome for the security of cryptocurrencnies)96 —are relatively few in number:
Makarov and Schoar (2021) estimate that around 55-60 controlled more than half of all Bitcoin
mining capacity at the end of 2020. In these respects, they are attractive points at which to require
information reporting. One might even envisage going further and imposing at that point somecorrective transaction tax (if determined to be helpful) and/or applying a (creditable) withholding
obligation: a charge on each transaction paid to, and credited/refunded by, the relevant tax
authority. Compliance with these obligations might be pursued in a number of way. The traces
that miners leave in the blockchain might help identify them as real entities. And/or incentives
might be found to encourage their compliance, if not in the form of some explicit subsidy to thecompliant (the optics of which might not be good) then in the familiar form of allowing some delay
in remitting tax withheld to the authorities.97
For at least the immediate future, however, tax administrations in most countries must deal withpotentially very limited directly usable information on cryptocurrency holdings and transactions.
This of course does not mean they are helpless.
Working in their favor is the vast amount of information publicly available in unpermissioned
blockchains. This provides scope for the application of techniques that have been developed
for the forensic analysis of blockchain structures; some taste of this is provided by analyses
discussed above, and there are, for example, firms that hold out the prospect of linking legal names,
account numbers and IP addresses to virtual asset service providers (such as crypto exchanges).98
Artificial intelligence applications can draw on past experience to identify potentially tax-relevant
behaviours, and there is of course room too for traditional investigative methods that seek links
94 Figures for the use of peer-to-peer sites were much the same.
95 This is suggested, from a perspective wider than that of taxation, by Makarov and Antoinette (2022).
96 This is because concentration in mining increases the risk of a ”51% attack”, by which malicious actors become able

to manipulate the contents of the blockchain.
97 One could also conceive of levying some form of penalty on entities found to be using non-compliant miners. This
though would require that users be able to select miners ex ante, an option not now available and which, by limiting thenumber of miners, might again have implications for the security of the blockchain itself.
98As for instance at https://ciphertrace.com/solutions/.

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with information obtained outside the chain.
There also remain other and more standard measures to encourage self-reporting, such as
taxpayer education, both general and targeted, and nudges. Large and successful actions can beused to send appropriately chilling messages: that the FBI, for example, “is able to uncover thesource even the most sophisticated schemes and bring justice to those who try to exploit the securityof our financial infrastructure,” and that a seizure of NFTs in the UK“serves as a warning to anyone
who thinks they can use crypto assets to hide money from HMRC”.99 Given the profundity of thefundamental challenges posed by quasi-anonymity, the astonishingly rapid pace of change in thearea, its technical complexity, the vast information gaps, the uncertainties ahead, and a sense thatthe tide has not yet turned in the battle to incorporate crypto properly into the wider tax system,
one might detect in such statements some element of whistling in the dark. It is clear, in any event,that living up to these confident assertions is not easy.

5.3

Value Added and Sales Taxes

Much of the discussion of the tax implications of cryptocurrencies, and of crypto assets moregenerally, has focused, implicitly or otherwise, on the taxation of income, and especially of capitalgains. Looking forward, however, some of the greatest risks to the broader tax system may be thosearising in relation to the VAT and sales taxes.
The use of cryptocurrencies to acquire goods and services directly is apparently modest now,and not a feature of everyday life (even where Bitcoin is legal tender). And indeed in some respect,
as also seen above, current tax rules may impede its use as a means of payment, If such use were to
become widespread, however, it could create potentially significant dangers to the integrity of VAT
and sales tax systems. One obvious risk is that widespread use of crypto currencies could facilitate
the underreporting of final sales. This is not a new problem: indeed a focus of tax administration
for decades has been to counter this risk, especially in relation to cash purchases. And that has
been done with some success. Crypto, however, may open up a new front in this battle, waged
with new and complex weapons.
The first line of defense is imposition of a legal requirement on all businesses to report large
crypto transactions, of the kind, noted above, that is now in place in the US and envisaged by OECD
(2022). Such rules are clearly not sufficient to bring the dangers to tax systems set out above under
99 Quotations respectively from FBI Deputy Director (Department of Justice, 2022b) and HMRC Deputy Director of
Economic Crime (Guardian, 2022). The UK seizure was not specifically crypto-related tax offence but was releatedto the financing of a potential VAT fraud. HMRC has also let it be known that it “is opening increasing numbers ofinvestigations into people who have only disclosed modest amounts on their tax returns whilst transacting majoramounts in crypto. HMRC is said to have [about] 20 new criminal investigations underway involving crypto and forevery criminal investigation there are likely to be dozens of civil investigations” (Park, 2022).

29

control: they are neither self-enforcing nor all-encompassing. And they face the same difficulties asabove from decentralized trading or use of non-reporting foreign exchanges. But they are close tonecessary, in generating red flags, clues for audit, and increasing the downside risks of evasion.
For the VAT, further challenges may arise in the use of cryptocurrencies as a convenient device
for fraud, for example in creating carousels that enable refunds to be claimed for tax that has notbeen paid.100 This is again not a new problem, but one that the use of cryptocurrenices may cast in
a new form.
Little systematic thought appears yet to have been given to protecting sales taxation and,bringing additional complexity, the VAT, against these challenges. The risks, for now, appear morelatent than real. But this can change.

6

Conclusion

The future of cryptocurrencies is highly uncertain. For some, they are a bubble that will sooner
or later fully implode. To others, they will prove the foundation for fundamental innovations indecentralized finance. In either case, however, tax systems need to accommodate them with acoherence, clarity and effectiveness that, not having been constructed without crypto assets in
mind, they currently lack. They need to do so, moreover, in the context of continuing rapid andcomplex innovation, on the basis of limited information, and while balancing the core objectivesof securing efficiency, fairness and revenue in taxation against the risk of stifling innovation. The
challenges are both conceptual and, still more, practical.
Conceptually, the dual nature of cryptocurrencies as both investment assets and means of
payment—–the latter, though less prominent than the former, being a primary purpose for theirdevelopment—creates potential difficulty in capturing capital gains and losses in their asset role
without thereby constructing obstacles to their use as currency. For the VAT and sales taxes, while
many issues of detail arise, the critical step is to ensure that cryptocurrency is treated the same
way as national currencies. What is needed for income tax purposes (for instance providing
exemptions for reasonable personal use as currency) will depend on existing national structures forthe treatment of gains and losses and of foreign currency transactions.
Questions also arise as to a potential corrective role for taxation, whether, for example, toaddress internalities associated with gambling or as a stop-gap to dampen change pending theimplementation of effective regulation. Much more clear cut, and now becoming the focus ofsome action, is the case for some charge—ideally as a part of a wider carbon tax, or if not as
100 On the nature of carousel fraud, see for example Keen and Smith (2006).

30

a sector-specific charge—to address the significant climate impact of proof-by-work consensus
mechanisms.
It is in implementation, however, that crytpocurrencies pose the most severe problems. Thisis because their essence, and the core motivation behind their development, is precisely to avoid
placing trust in centralized institutions of a kind that might be able to provide information to thetax authorities, or perhaps to levy some kind of withholding tax. The first step for governments,
nonetheless, is to apply AML rules and third party reporting requirements where they can, as
the US has recently done. The risk, however, is that transactions will to some degree migrate
to forms (on decentralized exchanges or directly peer-to-peer) that no third party even sees. It
might be, however—somewhat ironically, in terms of the original vision for crypto—that investors
come to place more trust in well-regulated institutions than in the ‘Wild West’ of decentralized
trading. More speculatively, miners—who do see every transaction in non-stablecoins—might inprinciple be given a role in tax reporting/withholding, consistent with the general principle of tax
administration favoring collection, where possible, at a relatively small number of upstream points.
These difficulties are amplified, moreover, by the ease with which crypto transactions are
conducted across borders, so that domestic tax measures might also result in trades shifting to
non-reporting platforms abroad. The OECD (2022) has developed a framework for extending
current arrangements for cross-border information to crypto, but implementation remains someway in the future and in any case will not in itself resolve the challenges posed by decentralized
trading.
It is hard to assess the extent to which the quasi-anonymity of crypto facilitates tax evasion(beyond that associated with outright criminality, which accounts for a declining share of activity
in crytpocurrencies). There is, however, evidence of a degree of compliance, at least for theUS, with about one percent or returns reporting crypto sales and signs of significant avoidance
activity. In terms of the amounts at stake, rough calculations suggest that in 2021, a ‘good’ year for
cryptocurrencies, a global tax at 20 percent on accrued capital gains might have raised around USD
300 billion (which is about 12 percent of global revenue from the corporate income tax. But in the‘bad’ year of 2022, revenue would likely be eroded by large capital losses.
As for those likely to have gains subject to tax, while information is limited, there is strong
evidence that crypto wealth is highly concentrated, even more so than ownership of equities. This,it seems, is not just a matter of a handful of crypto billionaires, or of the few who have become
wealthy by investing in crytpo, but of holdings by a wider but unknown set of the rich whose
wealth derives from other sources. It may be of course that the deepest problems here are notdistinctive to crypto but apply to the capital gains taxation of other assets too, especially at the31top of the income distribution. Worth bearing in mind, however, is that, at least in the UK and
US, many holders of cryptocurrencies are far from rich, with incomes that are lower than otherinvestors and often no more than moderate.
Such literature as there is on the taxation of cryprocurrencies has focused on income tax aspects,
which is indeed that most relevant to the taxation of the rich that is the topic of this issue. Much lessattention has been paid to the implications for sales taxation and, especially, the VAT. These may,
however, be profound, as cyrptocurrencies potentially create problems similar to those associatedwith the use of cash, with which VATs have long struggled, and perhaps create new opportunities
for fraud. It is in this area that the risks to existing tax systems created by the use of cryptocurrencies
proves most profound—not least in emerging and developing economies in which demand for
crypto appears relatively strong while tax administration is relatively weak.

32

A

Appendix: The Mechanics of Cryptocurrencies101

A Distributed Ledger Technology (DLT) is one that makes some database available, for inspection
and/or amendment, to authorized users, with a protocol of consensus in place to ensure that—–without any need for a central authority–—all entries are accurate and protected against tampering.
The best known and most widely used DLT is blockchain, the distinctive feature of which is thattransactions are added to the database sequentially, with approval of each new block entailing
confirmation of previous blocks, and the use of encryption to make it extremely difficult to change
earlier entries. For many applications, such as tracking the movement of goods, the system is‘permissioned’, meaning that access and/or rights are in some way limited, and authority tointroduce and confirm changes restricted to particular users. Cryptocurrencies, however, aregenerally permissionless, meaning that access to the database is fully public; this requires particularmeasures to ensure trust in the database and avoid ‘double-spending’ of holdings.
Protection against tampering in cryptocurrencies rests on cryptographic methods that enableprivate information to be encrypted in such a way that its accuracy can be verified without revealingthat information itself.102 To implement this, users have a private key (or ‘address’) that is encrypted
into a public key that is known to all users, but from which it cannot be inferred. Details of a
proposed transaction, along with the public key, are then broadcast to all participants. The accuracyof that information and availability of the necessary coins is easily checked. The mechanism forvalidation, however—meaning addition to the chain—is made costly in order to deter tamperingand the use of the same funds more than once (‘double spending’), which in turn requires somereward for doing so. Under proof of work, this is done by having validators (‘miners’) compete tosolve—more accurately, guess a solution to—a complex numerical problem, requiring extensive
computing power, in return for which they receive an allocation of the crypto currency and/or a fee.
Under proof of stake, the task of verification is allocated probabilistically in proportion to an amountof crypto that is staked; the reward for such validation is again some amount of the cryptocurrency,with a loss of stake in the event of failure or misrepresentation. Once confirmed in this way, thenew block is added to the chain.
Stablecoins, being backed or with their supply controlled algorithmically, do not require verification in this way.
Private keys, from which public addresses are derived by encryption, are held in electronic/digitalwallets, which may be held offline (‘cold’) or by service providers, whether as custodians (taking
101 Many subtleties are skimmed over here; for more detail, see for instance Hallaburda et al. (2022) and Box 8-2 ofCouncil of Economic Advisers (2023).
102 This rests on the use of non-invertible ‘hash’ functions which map a number or text of arbitrary length into a unique
number from which it cannot be inferred.

33

control of the key, executing trades at the customer’s request) or simply providing security.

34

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