In mid-2021, I addressed cryptocurrencies in my column. The main conclusion back then was that it was all black money. That hasn't changed until today, and if anything, it has likely become more severe due to the increasing circulation of cryptocurrencies. The only aspect that might be noteworthy is their value development. For instance, the most well-known cryptocurrency, Bitcoin, was worth almost €60,000 at its peak, precisely on November 14, 2021: €56,323.17. As of the moment I'm writing this column, on July 17, 2023, at 12:04, it's worth €26,873.47, which represents a loss of over 50%. There have been better investments in recent years, but that's the nature of dealing with such extremely volatile investments. Notably, cryptocurrencies are entirely uncovered; they might as well be investments in bird feathers for the amount they are worth. In short, it's like a casino. Nevertheless, a well-running casino. Again, taking the figures from July 17, 2023: the total global value of all cryptocurrencies is €1,054,152,630,573. If I'm correct, that's more than a trillion euros. Now, suppose we apply the Dutch box 3 tax system and levy an annual tax on this amount. In that case, the taxable return would be approximately €63 trillion. Taxing that at 25% would yield over €15 trillion in global taxes annually. Various governments would certainly be pleased with that. On the other hand, you can view it differently. The Netherlands intends to introduce a wealth increase tax. Under such a tax, losses should naturally be deductible. On July 17, 2023, the value of cryptocurrencies was over €1 trillion, and as I mentioned earlier, they've dropped about 50% in value since November 2021. Assuming the same amount of cryptocurrencies in circulation, the global decrease in value is also around €1 trillion. Ministers of Finance in countries with a tax system allowing losses to be deducted certainly won't be eager to face such losses. In fact, it could lead a country to bankruptcy.
But, of course, this won't happen immediately. The cryptocurrency market is currently completely invisible from a fiscal perspective, or you can say it operates in the black. The first thing that needs to happen is for the cryptocurrency market to become visible and transparent for governments. That is going to happen, at least in the European Union (EU). Recently, the so-called DAC8 directive was adopted. This directive amends the European directive that provides for mandatory reporting of various financial transactions to governments, with these authorities automatically exchanging this information among themselves. The assistance directive is mainly known for providing information on interest but covers many other types of income as well.
Globally, the OECD has implemented a similar system to the assistance directive as part of the so-called Inclusive Framework (IF), called the Common Reporting Standard (CRS). However, the CRS does not (yet) encompass cryptocurrencies, which is a significant shortcoming. DAC8, on the other hand, does, starting from 2026. Firstly, cryptocurrency service providers will be required to automatically provide information to governments. This information will only pertain to the cryptocurrencies owned by the residents of each country. An essential point, of course, is what to do about cryptocurrency providers outside the EU. If they are not included, a considerable leak could emerge. The problem is that non-EU companies do not fall under EU law, in principle. Nevertheless, DAC8 offers the possibility for them to be subject to the directive under certain conditions. More importantly, the CRS contains such rules as part of the IF. If a country does not participate, it automatically ends up on a gray or black list. This is usually an effective tool for most countries to force them to comply with the OECD's rules. However, there is still a challenging issue in all of this: cryptocurrency providers are not always physically located anywhere, but only have a digital presence. This poses difficulties for tax regulations since a physical location or permanent establishment is generally necessary for tax purposes. In short, there are still some challenges to address. Nonetheless, it is essential that this step has been taken because we need to eliminate this massive black market quickly. Although, there are quite a few cryptocurrency investors who believe that cryptocurrencies are not subject to taxation. However, that's a severe form of wishful thinking.
Peter Kavelaars is professor of Fiscal Economics at Erasmus University Rotterdam and of counsel at Deloitte Caribbean.