Tax Reporting as Regulation of Digital Financial Markets

FTX’s recent collapse highlights the overall instability that blockchain assets and digital financial markets face. While the use of blockchain technology and crypto assets is widely prevalent, the associated market is still largely unregulated, and the future of digital asset regulation is also unclear. The lack of clarity and regulation has led to public distrust and has called for more dedicated regulation of digital assets. Among those regulatory efforts, tax policy plays an important role.

This Essay introduces comprehensive regulatory frameworks for blockchain-based assets that have been introduced globally and domestically, and it shows that tax reporting is the key element of those regulatory frameworks. Furthermore, this Essay argues that tax reporting and transparency requirements can significantly stabilize the digital financial market and provide additional funding for much-needed regulatory programs through increased tax compliance. Tax reporting requirements have been effective tools in traditional financial markets. By replicating such policies in the digital financial market, the market would significantly improve.

These requirements would help combat money laundering and tax evasion. Also, reporting requirements that target both financial institutions and taxpayers would increase tax compliance and lower administrative burdens. The requirements also have the potential to generate revenue, which can fund additional regulatory developments. For these reasons, tax reporting requirements could be an important tool whose utilization would bring much needed stability to digital assets and the market.