Working Paper: NBER ID: w30716
Authors: Lin William Cong; Wayne Landsman; Edward Maydew; Daniel Rabetti
Abstract: We describe the landscape of taxation in the crypto markets, especially that concerning U.S. taxpayers, and examine how recent increases in tax scrutiny have led to changes in trading behavior by crypto traders. We predict under a simple theoretical framework and then empirically document that increased tax scrutiny leads crypto investors to utilize legal tax planning with tax-loss harvesting as an alternative to non-compliance. In particular, domestic traders increase tax-loss harvesting following the increase in tax scrutiny, and U.S. exchanges exhibit a significantly greater amount of wash trading. Additional findings suggest that broad-based and targeted changes in tax scrutiny can differentially affect crypto traders' preference for U.S.-based exchanges. We also discuss other gray areas for tax regulation related to new crypto assets such as Non-Fungible Tokens and Decentralized Finance protocols that further highlight the importance of coordinating tax policy and other regulations.
Keywords: cryptocurrencies; tax loss harvesting; tax compliance; wash trading
JEL Codes: G15; G18; G29; K29; K42; O16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increased tax scrutiny (H26) | Rise in tax loss harvesting (H26) |
| Increased tax scrutiny (H26) | Increased tax compliance behaviors (H26) |
| Increased tax scrutiny (H26) | Higher levels of wash trading in U.S.-regulated exchanges (G18) |
| Tax loss harvesting (H26) | Commitment to reporting trading activities to tax authorities (H26) |