The impacts of cryptocurrency on cross-border transactions

The broad adoption of crypto is reshaping cross-border transactions globally. From a tax perspective, these transactions create inconsistencies and complexity. At the root of these inconsistencies are the varying country-by-country treatments of crypto assets and transactions.

Using the United States as an example, when crypto is used for cross-border payments, a taxable gain or loss is recognised under a property-based regime generally governed by Internal Revenue Code (IRC) Sec. 1001. Accordingly, the recipient recognises income based on the fair market value of the crypto at the time of payment. If the same recipient is located in a jurisdiction treating crypto as currency, the result is a mismatch in income type preventing the utilisation of tax credits and giving rise to double taxation.

Beyond the income type mismatch, crypto complicates the application of traditional income sourcing principles. Payments through digital wallets can obscure the identity and location of both counterparties. This lack of transparency creates compliance and enforcement difficulties under global withholding tax regimes. 

Valuation is another critical global challenge impacted by crypto. Because crypto values can fluctuate significantly daily, determining the fair market value of a cross-border transaction can produce varied results. Both jurisdictions involved in a transaction could rely on different exchanges and timestamps, creating further disparities in reporting income.

These valuation challenges are further complicated by transfer pricing standards. Cross-border crypto transactions must satisfy the same international guidelines that cover arm’s length principles. The varying asset characterisation, and valuation volatility, can significantly distort comparability, and requires the application of clear and consistent valuation policies. Therefore, using an Organisation for Economic Cooperation and Development (OECD) Development, Enhancement, Maintenance, Protection, and Exploitation (DEMPE) framework is highly encouraged. 

Unfortunately, tax treaties offer limited guidance and effectiveness in resolving these complex issues. While most tax treaties were implemented in the 1960s through the 1980s, the treaties were not designed with digital assets in mind. As a result, the treaties are ill equipped to adequately address the complexity of crypto currency and digital assets.

These rising issues provide opportunities. Global efforts are underway by tax authorities, and regulatory agencies to address crypto valuations and transactions. Among those initiatives, the OECD is leading an initiative to improve transparency through the Crypto-Asset Reporting Framework, while tax authorities have begun leveraging blockchain analytics to trace cross-border activity. 

Ultimately, crypto is here to stay. For forward thinking and proactive practitioners, crypto-related services could be a tremendous opportunity in the marketplace.

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James Duncan is a senior international tax manager with Navolio & Tallman, LLP. He has more than 20 years of experience in international taxation in both the private and public sectors. He specialises in international tax compliance for individuals and businesses, focusing on corporations, cross-border transaction planning and compliance, international business restructuring, and information reporting.