Will Crypto be New Tax Haven?

By: Bluma Gross  |  May 13, 2022

By Bluma Gross, News Editor 

The rise of cryptocurrency revolutionized global economic processes since its inception in 2008. Cryptocurrencies’ novel characteristics, such as decentralization and semi-anonymity, makes the digital currency an extremely appealing platform for cyber exchanges. However, while crypto has had several positive aspects, such as lowering transaction costs, eliminating borders, and ensuring secure and private exchanges, cryptocurrencies may also present a new way to conduct shady transactions. As war in Ukraine becomes more unpredictable by the day and an increasing amount of sanctions mount on Russian oligarchs by Western powers, it seems that cryptocurrencies may be an alternative for Russian oligarchs to evade these sanctions.

Cryptocurrencies operate through blockchain technology. Blockchains are secure digital ledgers accounting for all crypto-transactions. These ledgers can be private or public and may be a tool for governments to track said transactions. Yet, due to cryptocurrency’s decentralized nature and global scope, it may be quite the challenge for governments to coordinate and fight against tax fraud and other financial crimes facilitated by blockchain.

Some positive aspects of digital currencies are that they allow users in economically unstable areas to trade and invest in places with more stability, somewhat leveling the international financial playing field. The anonymity of digital currencies also allows secure and private transactions, providing a degree of privacy that cannot be ensured by intermediaries like banks and other financial institutions. 

The crackdown on international tax havens with the release of the Panama and Pandora Papers has exposed massive corporate, public and political official’s tax evasion and fraud. Some people who were exposed for sketchy offshore accounts include the Crown Prince of Jordan, Vladimir Putin, and Tony Blaire.

In the United States, Congress passed the Corporate Transparency Act to combat money laundering and to “increase information sharing between law enforcement, financial institutions, and financial regulators.” However, the lack of international regulatory legislation makes it difficult to combat money laundering, tax evasion, and corruption on the same scale in which the fraud occurred, posing current and future risks to economic stability and oversight. 

According to Omri Marian, an expert in international tax law and comparative taxation, cryptocurrencies may be the new “super tax havens.” Marian contends that crypto currencies have two of the most significant features of traditional tax havens: they are foundationally anonymous and decentralized. These elements render cryptocurrencies as the ultimate mechanism to commit tax evasion and tax fraud. 

In the United States, cryptocurrencies are treated as property for federal tax purposes. United States crypto policy greatly contrasts to places like Portugal, where there are no taxes on crypto currency gains, and have become a crypto “tax haven”.

However, EU policymakers recently proposed a law to combat shady transactions to the European Commission. The proposal suggested prohibiting anonymous crypto-asset wallets and ensuring that crypto-assets are fully traceable, stripping the digital currency of its defining characteristic. 

Sanctions on Russian oligarchs have not stopped or slowed down Putin’s military campaign in Ukraine. Though the United States and United Kingdom have sanctioned Russian oligarch’s who amassed wealth at the expense of the Russian masses. Though countries like the US and UK have frozen assets of the oligarchs, many cryptocurrencies still use private blockchains and do not require identity verification, it may still be possible for Russian oligarchs to transfer their liquid funds to crypto. 

Given the mixed response from global actors, it seems unlikely that there will be any international laws or organized coordination between economic and financial institutions to seriously combat tax crimes and corruption.