Cryptocurrencies now the new super tax havens


Technology is changing fast. And is coming with new and sophisticated products, both financial and others. Amongst the recent and new financial products to hit the global stage are cryptocurrencies and block chains. Debates have erupted around the taxability of these products, which is the focus of this article. This article argues that there are two views on whether cryptocurrencies and block chains are replacing tax havens as super tax havens. The first view is that bitcoins and similar cryptocurrencies are secured private investments acting as super safe havens. The second view states that Bitcoins and Tethers and similar cryptocurrencies are secured conventional investments stored in text algorithms which are transmitted in a real global economy. Thus, information can be accessed by third parties and therefore cannot replace tax havens. Thus, encouraging investors to hold both Bitcoins and Tethers would not create super safe havens and help the development of more stable cryptocurrencies that have the ability to overtake fiat currencies as medium of exchange, store of value and unit of account. Governments could take advantage of, especially, the stable coins for income tax purposes and help stimulate currency development and innovations. Cryptocurrencies are a subcategory of virtual currencies, which are online payment systems that function like real currencies, but which have no central bank backing. Cryptocurrencies are computer files tendered as a form of payment for real goods and services. The most well-known, and currently the most successful example of cryptocurrency is the Bitcoin, first introduced in 2008. However, both views agree that cryptocurrencies are an innovation that attempts to obscure taxpayers’ incomes and help hide such incomes from the tax administration authorities.

First View: Crypto Currencies are Super Tax Havens

Those in support of the first view argue that corporations and individuals are using crypto currencies and block chains to engage in offshore tax evasion and that tax evaders are no longer using the traditional banking industry for savings accounts and international trade transactions, among others.  While corporations and wealthy individuals use cryptocurrencies for legitimate purposes, they are also well suited to support illicit transactions. The proponents of the first view argue that cryptocurrencies possess the two most important characteristics of a traditional tax haven. The first characteristic is that since there is no jurisdiction in which cryptocurrencies operate and because they are “held” in cyberspace, crypto currencies are not subject to taxation at source. The second characteristic is that cryptocurrency accounts are anonymous. Therefore, users can start as many online “wallets” as they want to buy or mine Bitcoins and trade them without ever providing any identifying information. By implication, banks do not have the technology to collect transactional information on the taxpayer. Therefore, the proponents of this view believe that cryptocurrencies have the potential to become super tax havens. To illustrate the super tax have characteristic, they postulate that a service provider could theoretically accept payments for real services in Bitcoin (or any cryptocurrency). Given that the service provider is not required to identify herself when establishing her online Bitcoin wallet, it would be very difficult to trace the earnings accumulated in this wallet back to the service provider. Under current Zambian and Zimbabwean income tax laws, such income is clearly taxable to a Zambian or Zimbabwean service provider. It is unlikely, however, that both the Zambia Revenue Authority (ZRA) and the Zimbabwe Revenue Authority (ZIMRA) or any other tax authority will know about the income unless the service provider voluntarily reports it.

Second View: Crypto Currencies are a source of Taxpayer Information

The second view is supported by those that argue that there is a jurisdiction in which crypto currencies operate and are “held” in cyberspace accounts known as online “wallets”, crypto currencies can be subjected to taxation at source. Furthermore, they argue that cryptocurrency accounts are known, since transactions involve more than one party. Therefore, users can start as many online “wallets” as they want to buy or mine Bitcoins (cryptocurrencies) and trade them without ever providing any identifying information, but this information is easily read by third parties. Therefore, by implication, the proponents say that there is no information transfer that cannot be intercepted by third parties. In this regard, the supporters of the second view do not regard block chains and crypto currencies as perfectly secured and therefore there is no place on earth to hide.

Governments’ Reactions on Cryptocurrencies, Benefits and Costs of Cryptos.

Governments have more regulatory challenges of virtual currencies, including the potential of Bitcoin (cryptocurrencies) that facilitate tax evasion than with stable coins, which facilitate taxation. Thus, governments need to fully consider stable coins and introduce them by encouraging financial institutions to participate and use them as tax-enforcement agents. For example, in 2007, the Internal Revenue Service (IRS), USA looked into potential tax compliance risks associated with web-based payment systems and eventually opted not to act. One of the reasons cited for inaction was the lack of strong evidence of the potential for tax noncompliance related to virtual economies. In 2007, the increasing popularity of Bitcoin had just started to take shape and less information was available. Therefore, the 2007 IRS action did not consider the development of major peer-to-peer, open-flow payment systems such as the Tether coins, which operate in real economies and are not limited by the volume of virtual in-game economies. Governments have recently indicated that the increasing use and misuse of cyber-based currency and payment systems to anonymously transfer illicit funds as well as hide unreported income from the their revenue administration institutions is a threat to the governments’ revenue and is being vigorously responded to. The challenge governments are facing is the development of enforcement mechanisms that allow tax authorities to discover funds hidden in cryptocurrency accounts. As noted, the cryptocurrencies market is growing and better and more stable cryptocurrencies being discovered. Eventually, cryptocurrencies will become more stable than fiat currencies and will be used as real money to purchase real goods and services in the real world.


Cryptocurrencies have been gaining confidence and popularity among users, and their market volume is increasing. On one hand and according to the first view, cryptocurrencies offer, at least theoretically, a near-perfect alternative to tax-evaders who can no longer find a safe haven in tax-haven jurisdictions. It is thus reasonable to expect that as the market volume of cryptocurrencies, such as bitcoins, increases, so will the tax avoidance associated with it. On the other hand and according to the second view, cryptocurrencies traders are known and offer an alternative to conventional investors to hedge against asset volatility and pay taxes. This article is therefore in support of the second view that cryptocurrencies are not taking over tax havens as super tax havens, but that they are designed to take over fiat currencies. To date, most tax policymakers seem to be operating under the traditional assumption that cryptocurrency-based economies are limited by the size of virtual economies and that they exist to aid tax evaders. This is an early misconception of the cryptocurrency market and could be a missed opportunity to tap into tax revenue, especially of the new stable coins.

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