Nayib Bukele’s tune has seemingly changed his stance on the International Monetary Fund (IMF). Bukele once laughed at its bankers causing a dip in bitcoin (BTC) prices, refused to consider repeated requests to revoke the crypto as legal tender, and angered IMF workers with various tweets.

He has also censored the IMF’s views within El Salvador and refused to meet its demands for debt refinancing.

However, yesterday, the president’s staff kowtowed to IMF demands, agreeing to confine his administration’s BTC-related economic activities and transactions, eliminate the acceptance of BTC tax payments, and unwind the government’s involvement with its once-state-backed BTC wallet and ATM network, Chivo.

Bukele made these compromises to get access to a paltry $1.4 billion loan extension to fund his administration’s reform agenda.

“IMF staff thank the Salvadorean authorities for the excellent collaboration and candid dialogue,” press officers wrote, juxtaposing Bukele’s defiant statements with his compliant acquiescence.

Salvadoran authorities also agreed to formalize a policy of voluntary acceptance of BTC as a method of payment for all Salvadoran business owners.

Bitcoin to no longer be accepted as legal tender for tax payments

In the end, it all comes down to dollars and cents at the negotiation table. Going forward, according to an agreement by Raphael Espinoza on behalf of Salvadoran authorities, US dollars would be the only acceptable denomination for tax payments in El Salvador.

Assuming El Salvador keeps the promises it has made to the IMF and implements these reforms by drastically dialing back BTC use in the country, the IMF Board will approve its $1.4 billion loan extension request in February next year.

Read more: Bitcoin makes IMF hesitant to issue new loans to El Salvador

The country’s GDP is approximately $34 billion and grows roughly 3% per year.

Because the country claims to own 6,192 BTC, Tim Draper claimed on October 24 that a rally to $100,000 per coin would allow the country to repay its IMF loans “and never have to talk to them again.”

That obviously didn’t happen. Like much of Bukele’s social media-posturing against the IMF, his debts came due and quickly checked him back to reality.

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IMF Communications Director Julie Kozack reiterated today that “addressing risks arising from Bitcoin is a key element of these discussions” in reference to negotiations between El Salvador and the IMF regarding a loan program.

El Salvador is still heavily indebted, and Bitcoin is not helping the country refinance its debts with the International Monetary Fund (IMF). According to the IMF, its member countries should not grant crypto assets official currency or legal tender status. 

El Salvador did not follow those instructions.

Read more: El Salvador Bitcoin agency reportedly made $235 this year, $7M off target

As of June 30, the country owed a relatively manageable $188 million (143.6 milion SDRs valued at $1.31534 apiece) in outstanding debt to the IMF.

Although the figure is relatively small for a sovereign nation, credibility with the IMF is critical to El Salvador for its refinancing of existing debts.

Even for non-IMF loans, the IMF is critical

Indeed, El Salvador is perennially refinancing billions of dollars in various types of debt from lenders who use IMF’s praises or admonishments as a bellwether similar to S&P sovereign creditworthiness ratings.

Earlier this year, its congress issued another $1.5 billion, for example. Like all US dollar-pegged countries, because El Salvador cannot print US currency to repay its debts, it must raise true loans and pass creditworthiness checks. In sovereign debt markets, the IMF is a critical ally for even non-IMF lenders to grant credit facilities at favorable rates.

Unfortunately, the IMF is vocally skeptical of bitcoin’s role in nation-state dealings. After all, the price of bitcoin regularly fluctuates by high single-digit percentages on an intraday basis, suffers flash crashes, and experiences drawdowns in excess of 70% every few years.

In June 2011, the price of bitcoin crashed 99% within one day. In December 2017, it crashed 80%. Even as recently as March 12, 2020, bitcoin crashed 40% in a single day.

According to the IMF, El Salvador was making progress as of August to “mitigate potential fiscal and financial stability risks from the Bitcoin project.” However, its statements today indicate that Salvadoran President Nayib Bukele has not yet satisfied the IMF’s requests at the negotiation table.

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International Monetary Fund (IMF) researchers published a working paper describing the challenges introduced in collecting taxes related to cryptocurrencies.

Specifically, the report highlights how, given that cryptocurrencies act as both investments and currencies, the appropriate tax treatment has become more complicated. It also explains how the pseudonymous nature of cryptocurrency systems makes collection and enforcement of the tax code more difficult.

The paper discusses how, in most cases, cryptocurrencies are treated as property for the purpose of income taxes. This means they generally have capital gains taxes — adding a significant administrative load for those who choose to transact using them, and requiring calculations for every transaction.

For value added taxes (VAT) and sales taxes, the IMF highlights how the pseudonymous nature can make collection difficult and therein the need for accurate records of when transactions occurred due to the volatility in prices. It also highlights how VAT can be applied to cryptocurrency miners to newly minted coins.

Read more: IRS wants to know if NFTs count as collectibles for tax purposes

The paper also discusses the controversial proposition of taxing proof-of-work miners due to their environmental externalities, suggesting they are best targeted with a broad carbon tax, but does suggest more targeted taxes could be justified.

Tax evasion means billions lost, IMF predicts

The researchers also highlight how there is meaningful tax evasion in the cryptocurrency ecosystem, though they also note that given “the serious crimes that have been the primary focus of concern and investigation, however, tax evasion is likely a by-product rather than a primary motivation; indeed, the purpose of the extensive money laundering in cryptocurrency is to make illegal gains appear legal, and even perhaps consequently subject to some tax.”

Unfortunately, the paper is unlikely to provide an estimate on the scale of tax evasion, but it does attempt to provide estimates for the potential amount of revenue. Researchers attempt a couple techniques for “back-of-envelope” calculations and ultimately suggest that the potential revenue from improved taxation of cryptocurrency capital gains is somewhere between $10 billion and $323 billion, depending on the degree of volatility and amount of gain realized. 

They also provide estimates for various transfer or payment taxes, including applying the tax applied to securities trading by the European Commission, which they estimate could come to around $15.8 billion, but assume all cryptocurrency transactions are treated as security transactions.

If all cryptocurrency transactions were instead taxed as VAT, they estimate the potential revenue to be between $47.4 billion and $118.5 billion, depending on how much could reasonably be collected.

Fundamentally, the authors point out that the largest issue is that pseudonymity and its use in crime make accurately identifying and collecting taxes from cryptocurrency ecosystem participants harder than other financial rails. 

De-anonymizing crypto

Luckily, the authors are able to highlight some good news for tax authorities and bad news for crypto ideologues. “Contrary to the vision of the original crypto designers—a core role has emerged for centralized institutions of various kinds in the transacting of crypto assets.” They suggest that these are a natural target for tax authorities to ensure that users are identified under know-your-customer (KYC) rules and can enable tax authorities to help collect taxes. In the US, they discuss how the Infrastructure Improvement and Jobs Act made it so a larger number of providers are expected to report details to the Internal Revenue Service (IRS) about customer transactions.

The report further suggests decentralized finance (DeFi) potentially enables evasion of these reporting requirements, which the IMF suggests could potentially be rectified by increasing the information that miners themselves are expected to report — a controversial suggestion in the cryptocurrency ecosystem that does face problems in terms of identifying and interfacing with these miners.

Finally, the authors highlight how well cryptocurrencies are pseudonymous; the ledgers are very often public, and eventually this information can be determined even if it’s not currently possible.  

Read more: El Salvador’s Bitcoin City canceled — but did it ever really exist?

Previously, the IMF warned about the risks of nation-state adoption of bitcoin and other cryptocurrencies, but in this report discussing the adoption of cryptocurrencies for payments, it says “even the low figures in El Salvador are not unimpressive.”

Outside of taxes, the paper also highlights how increased usage of cryptocurrencies could potentially “undermine the tools of macroeconomic management” by reducing the influence of general monetary policy tools, which was among its many concerns previously with nations adopting cryptocurrencies.

This IMF work paper highlights the current difficulties for tax authorities in collecting tax revenues in a pseudonymous system and suggests that there is still significant interest in further de-anonymizing cryptocurrency.

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