Tax-Loss Harvesting with Cryptocurrencies

This study describes the landscape of taxation in the crypto markets concerning U.S. taxpayers, and examines how recent increases in tax scrutiny have lead to changes in trading behavior by crypto traders. Using a conceptual framework, we predict and find 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 compliance and 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 discuss new gray areas for tax regulation relating to new crypto assets such as Non-Fungible Tokens and Decentralized Finance protocols that highlight the importance of the coordination between tax policy and other regulations

Common Sense Recommendations for the Application of Tax Law to Digital Assets

In response to the Joint Committee on Taxation’s July 2023 request for comments on application of various Internal Revenue Code sections on digital assets, we propose a consistent set of rules to apply current law to digital assets. We highlight that the underlying economics and characteristics of transactions should be the primary concern for the application of rules and the valuation of digital assets. We believe any digital asset rules should (1) treat classes of digital assets with unique characteristics differently based on their economics, (2) minimize incentives for users to engage in tax-motivated structuring of transactions, and (3) allow the Internal Revenue Service authority to react to and regulate new classes of digital assets as they are created. We do not believe that the unique features of digital assets are a challenge to applying current law or warrant special tax preferred treatment

Coins for Bombs: The Predictive Ability of On‐Chain Transfers for Terrorist Attacks

This study examines whether we can learn from the behavior of blockchain-based transfers to predict the financing of terrorist attacks. We exploit blockchain transaction transparency to map millions of transfers for hundreds of large on-chain service providers. The mapped dataset permits us to empirically conduct several analyses. First, we analyze abnormal transfer volume in the vicinity of large-scale highly visible terrorist attacks. We document evidence consistent with heightened activity in coin wallets belonging to unregulated exchanges and mixer services – central to laundering funds between terrorist groups and operatives on the ground. Next, we use forensic accounting techniques to follow the trails of funds associated with the Sri Lanka Easter bombing. Insights from this event corroborate our findings and aid in our construction of a blockchain-based predictive model. Finally, using machine-learning algorithms, we demonstrate that fund trails have predictive power in out-of-the sample analysis. Our study is informative to researchers, regulators, and market players, in providing methods for detecting the flow of terrorist funds on blockchain-based systems using accounting knowledge and techniques.peerReviewe

Common Sense Recommendations for the Application of Tax Law to Digital Assets

In response to the Joint Committee on Taxation’s July 2023 request for comments on application of various Internal Revenue Code sections on digital assets, we propose a consistent set of rules to apply current law to digital assets. We highlight that the underlying economics and characteristics of transactions should be the primary concern for the application of rules and the valuation of digital assets. We believe any digital asset rules should (1) treat classes of digital assets with unique characteristics differently based on their economics, (2) minimize incentives for users to engage in tax-motivated structuring of transactions, and (3) allow the Internal Revenue Service authority to react to and regulate new classes of digital assets as they are created. We do not believe that the unique features of digital assets are a challenge to applying current law or warrant special tax preferred treatment