Governments across the globe are increasingly cracking down on tax evasion in the cryptocurrency industry. In the United States, the IRS has begun issuing subpoenas requesting transaction information from cryptocurrency exchanges, as well as sending reminders to taxpayers with crypto transactions. There is little evidence, however, whether these increased efforts will pay off through recouped tax revenue. In this paper, the authors measure the extent of crypto tax evasion and assess the effectiveness of tax enforcement interventions.
The authors study this question using rich data from Norway that links investors’ crypto transactions to their tax returns and demographic characteristics. They find the following:
- Crypto tax evasion is pervasive. Six percent of the Norwegian population are crypto tax noncompliers in the sense that they hold undeclared cryptos, and 88% of crypto holders fail to declare their cryptocurrency on their taxes.
- The majority of crypto tax noncompliers are male, young, and reside in Norway’s capital. This concentration is driven by differences in crypto adoption across individual characteristics, suggesting that authorities could use data on crypto adoption to target tax noncompliers.
- Crypto tax noncompliance is pervasive even among investors trading on exchanges that share identifiable trading data with tax authorities. Eighty percent of investors trading on the domestic crypto exchanges fail to declare their cryptos, even though these exchanges share identifiable trading data with the Norwegian Tax Administration. This suggests that merely subpoenaing identifiable trading data from domestic exchanges will not fully address crypto tax noncompliance.
- While many crypto investors fail to declare their cryptos, each owes, on average, only a modest amount of taxes. The authors estimate that the average value of tax evasion across all crypto tax noncompliers is between $200 and $1,087, suggesting that tax enforcement interventions need to be well-targeted or cheap for the benefits to outweigh the costs.
Building on these results, the authors assess the effectiveness of two low-cost tax enforcement interventions. For each intervention, they compare the benefits in terms of increased crypto tax revenue against the cost of the intervention. They find the following:
- The first intervention involves indiscriminately sending letters to anyone who previously declared crypto in their tax returns but then stopped, reminding them that cryptos are taxable. Reminder letters increase the probability of crypto tax compliance by 25 percentage points, and, on average, raise (just) enough tax revenue to cover the cost of the intervention.
- The second intervention involves sending a letter to a taxpayer requesting documentation (e.g., bank statements) to support the claims in their filed tax return. Such correspondence audits would be profitable if one could directly target crypto tax noncompliers or if they are targeted at a small segment of the population. Still, the revenue gains from well-targeted audits would be economically modest, and need to be weighed against the burden (e.g., time cost and lawyer fees) imposed on audited taxpayers.
The authors conclude that crypto tax noncompliance is pervasive, even among investors trading on exchanges that share identifiable trading data with tax authorities. The authors find that 6% of Norwegians hold undeclared cryptos, each owing a modest amount of taxes. Even if tax authorities know that a person is a tax noncomplier (e.g., by observing their crypto trades) any intervention to recover unpaid taxes would need to cost less than a few hundred dollars to be worthwhile. These results have direct implications for policymakers seeking to bolster compliance among crypto investors.