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PwC tax offers a coordinated global approach to digital assets, bringing together professionals from our dedicated digital assets network. We provide valuable insights that can help businesses across all industries understand, implement, and manage the direct and indirect tax consequences of their digital asset strategy. Our approach considers various tax activities including policy development and planning, tax characterizations, accounting methods, global structuring, transfer pricing, compliance, and information reporting obligations.
Strategic considerations for digital assets:
Innovative technology coupled with new economic models pose unique tax implications, and it is increasingly important to proactively evaluate and monitor the relevant tax considerations for digital assets.
Questions business leaders are asking
- What are key tax considerations for digital assets and web3?
- Would global indirect taxes apply to digital asset transactions?
- What considerations should an organization take before investing in digital assets or crypto?
What are key tax considerations for digital assets and web3?
Digital assets, such as cryptocurrency and non-fungible tokens (NFTs), coupled with the evolution of Web3 and the metaverse, have many unique tax considerations. Each digital asset and use case require careful assessment of all relevant income taxes, indirect and operational taxes, information reporting requirements as well as cross-border tax implications given the nature of these assets and their transferability.
Would global indirect taxes apply to digital asset transactions?
Global indirect taxes, whether Value Added (VAT), Goods and Services (GST), or Digital Services (DST), are increasingly being imposed on foreign sellers making sales of digital services to locally resident customers. More than 85 countries have such rules, with some dating back to 2015 or earlier. The application of these rules to Digital Assets, Web3, and metaverse transactions add further complexity, including the broad scope of existing rules and available exemptions (e.g., financial services), uncertainty around the party responsible for reporting, and technology challenges for customer identification. PwC's Digital Assets team has significant experience in consulting and compliance assistance with sellers, intermediaries, or investors around managing their global indirect tax obligations.
What considerations should an organization take before investing in digital assets or crypto?
It starts with embedding tax into the overall business strategy and spans through the development of new products, offerings, and services, assessing the impact on the global structure, transfer pricing, indirect taxes to tax reporting, and compliance obligations. PwC offers a coordinated global approach to digital assets, bringing together professionals from our dedicated digital assets tax network, to provide valuable insights that can help businesses across a number of industries understand, implement, and manage the direct and indirect tax consequences of their digital asset strategy and activities.
Digital asset tax services
US Direct - Federal income tax
- Our PwC Digital Assets Tax team has extensive experience in assisting businesses across a number of industries navigate key US income tax considerations, including:
- Income Tax characterizations for different types of digital assets (cryptocurrency, utility tokens. stablecoins, and NFTs) and transactions by use case by taxpayer profile
- Timing of income recognition and deductions (available elections)
- Tax basis determinations (permissible methods and valuations)
- Sourcing and jurisdictional allocations
- Tax treatment for lending, staking, and other common activities
- Consequences to foreign corporations owned directly or indirectly by US shareholders
- For asset and wealth management clients, PwC’s Digital Asset and Asset and Wealth Management Tax teams work together seamlessly to address:
- Fund structuring considerations unique to digital asset strategies,
- US trade or business considerations for typical investor and trader fund activities,
- Unrelated Business Taxable Income (UBTI) considerations for tax-exempt entities, and
- Issues specific to sovereign investors.
- We evaluate all of these considerations with a broader lens to the global tax environment
Global Structuring - International Tax
- Whether a nascent start up or an established technology company expanding its business ventures, the emerging field of decentralized digital assets built upon blockchain technology is an area that requires redefining the art of the possible, examining the fundamental nature of the customer-facing transaction, aligning the value chain with the substance of the business, and structuring legal entity ownership and transaction flows that are efficient from both corporate income tax lens and the transactional tax level. At the same time, taxing authorities around the world continue to grapple with the advent of digital assets and continue to develop frameworks to determine the appropriate method and value for taxation.
- While tax regulatory frameworks inside and outside the US evolve and play catch-up to the pace of emerging technologies and digital assets, PwC’s Digital Assets Global Structuring team can assist companies with a lens toward real world practicality and industry-wide observations, an extensive background in emerging and mature technology platforms, and a finger on the pulse of tax regulatory and legal developments. PwC offers an integrated cross-functional disciplinary view to the international landscape, helping companies in this developing space design a holistic approach to effective tax structuring that leans into the business strategy, teams with the operations team, and frames up a disciplined tax foundation that can be flexible and agile to a growing business both within and outside the United States while managing potential pitfalls.
Global Structuring - Transfer Pricing
Taxation follows profits and profits follow value creation. Thus, the central question in transfer pricing has always been where and how value is created. In the context of the new digital asset economy where the ownership of assets and the location of significant people functions are more decentralized, the value creation question is much more difficult to answer.
PwC’s Digital Assets Transfer Pricing team has significant experience with a wide variety of companies in the digital assets space, including but not limited to blockchain payments, blockchain infrastructure, token issuers and administrators, crypto exchanges, NFT marketplaces, software for digital asset operations, and blockchain gaming platforms.
We focus on the real value drivers:
What is the value contribution of technology IP when a lot of the tech is open source?
What is an appropriate return to marketing when many cryptocurrencies and platforms are competing for customer attention?
How important are regulatory efforts/licenses in a space where regulation is still very much a work in progress?
What is the significance of capital, regulatory or otherwise, when its absence can bring down billion-dollar businesses overnight?
What is the transfer pricing paradigm that most effectively fits the facts?
These and other novel questions are the starting point for a robust transfer pricing analysis.
Our transfer pricing teams, with their extensive and diversified experience in this new economy can help you prepare for the future.
US Direct – State and Local Tax
There are significant state and local income and franchise tax considerations inherent in the digital assets space. Specifically, the states’ characterization of the digital assets and related transactions can have a broad impact on a taxpayer’s state tax profile, affecting calculations of state taxable income, allocation and apportionment factors, and qualification for special entity designations. Furthermore, given the widespread adoption and utilization of digital assets, there are significant nexus and filing methodology implications for all taxpayers.
PwC's Digital Assets State and Local Tax team has significant experience providing income and franchise tax consulting and compliance services to a wide variety of companies including asset managers, banks, platform operators, exchanges and other technology companies. We routinely assist companies analyze their state tax profiles, advise on allocation and apportionment matters, evaluate state tax calculation and conformity issues, review filing methodologies and assist with reorganizations and planning initiatives. In addition, we leverage our extensive network of state tax specialists, many of whom previously worked at the states’ revenue agencies, to support our clients’ state tax controversies, pursue voluntary disclosure agreements, and seek client specific letter rulings and alternative apportionment agreements.
US Indirect – Sales & Use Tax
States that have provided guidance around digital assets generally treat cryptocurrency as intangible property or a medium of exchange, with no sales tax due on cryptocurrency exchanges. However, sales tax is due when cryptocurrency is used to purchase taxable property and services. State guidance varies as to how to compute the tax base (e.g., advertised selling price of the product, cryptocurrency value at the time of the transaction, or cryptocurrency value as of the date of payment).
In addition, US sales and use taxes may apply to the sale of digital assets and transactions that occur in the metaverse. State taxing departments are starting to issue guidance on the taxability of such transactions and educating themselves on emerging technologies (e.g., cryptocurrency, NFTs, blockchain) so they can capture potentially lost tax revenue.
PwC's Digital Assets Indirect Tax team has significant experience in consulting on the US sales and use tax implications of emerging technologies, and we work closely with both Fortune 100 companies and technology start-ups. We can assist these companies by assessing their tax exposure and helping them understand where the risks lie with respect to U.S. sales and use tax compliance on a go-forward basis and manage their out-of-pocket cash costs.
Global Indirect Taxes (VAT)
Global indirect taxes, whetherValue Added (VAT), Goods and Services (GST), or Digital Services (DST), are increasingly being imposed on foreign sellers making sales of digital services to locally resident customers — over 85 countries have such rules, with some dating back to 2015 or earlier. For simplicity, we use “VAT” to refer to all such taxes. VAT rates average 20%, with low (or non-existent) de minimis thresholds below which sellers may be relieved of their VAT obligations. Tax authorities have been known to proactively contact foreign sellers, requesting that they comply or provide an explanation for non-compliance. As these VAT rules are destination-based, irrespective of the seller’s location, compliance depends on a seller’s ability to collect specific information about their customers in real time, for example:
the location of their customer;
their status as a non-business (typically private individuals) or a business registered for VAT, since many (though not all) countries limit the seller’s collection responsibility to non-businesses, though tax authorities in those countries will still expect the seller produce evidence of their customers’ business status in order to be relieved of their VAT obligations;
the channel through which the customer makes their purchase, as some countries may shift the compliance responsibilities to an “intermediary” through whose marketplaces the digital services are sold, even if the digital content is not owned by the marketplace operator.
The application of these rules to metaverse transactions add further complexity. Some key challenges include:
The broad scope of VAT typically means that NFTs and most cryptocurrencies are treated as “digital services” prima facie within scope of VAT digital service rules.
The involvement of multiple parties in the ecosystem can make it particularly challenging to determine which (if any) of them bear the responsibility for VAT on the transaction.
Customer identification may not be readily available, particularly if it is collected and maintained by a third party other than the seller or marketplace (e.g. by the host of the customer’s crypto wallet), resulting in challenges in attributing transactions to the appropriate jurisdiction to apply VAT rules.
VAT exemptions for financial transactions have not evolved and tax authority guidance is nascent, so their application to cryptocurrencies can be unclear, with NFTs usually treated akin to other digital services subject to VAT.
PwC's Digital Assets Global Indirect Tax team has significant experience in consulting and compliance assistance with sellers, intermediaries, or investors. We assist clients with:
assessing potential indirect tax obligations worldwide;
advising on approaches for addressing gaps in customer data;
advising on communications with customers regarding VAT obligations, whether in contract terms and conditions, FAQs, customer onboarding, transaction checkout screens, or invoices/account statements;
planning strategically for remediation and ongoing compliance, and assisting with tax authority communications;
advising on ERP or other automation tools to streamline VAT compliance; and
evaluating financial statement reserves and disclosures.
Information Reporting
- The increasing use of Digital Assets for investment and payment purposes has been observed by tax administrators who are focused on closing the tax gap by increasing tax reporting obligations and decreasing the opportunities for tax evasion. As such, the OECD, European Union, and United States are creating third party tax information reporting frameworks for payors, intermediaries and other service providers involved in crypto-asset transactions to increase transparency and improve tax compliance. Unlike traditional financial assets, digital assets can be issued, recorded, transferred, and stored in a decentralized manner without the intervention of financial intermediaries or central administrators. Therefore it is more difficult to assess which asset is in scope and who would be subject to these reporting requirements.
- Our PwC Digital Assets Information Reporting team has end-to-end solutions from consulting to reporting for these newly developed third party tax information reporting and withholding frameworks.
- Our third party tax information reporting services include facilitating the identification of reportable payments and transactions that utilize digital assets, tax information reporting to meet government regulations and to provide the highest level of customer service for information returns provided to investors, customers and other relevant payees.
Digital asset regulations: What you need to know
The IRS released much-anticipated proposed regulations requiring information reporting by brokers on the calculation of gain or loss for digital assets. Jamison Sites shares his insights on the broad range of transactions affected and steps brokers might consider taking to comply with this new guidance.
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We know that successful investing in digital assets depends on a structure that works both for your business goals and tax strategy. While tax regulatory frameworks evolve and the pace of emerging technologies and digital assets continues to race forward, our team can assist you with a lens toward real world practicality and industry-wide observations, extensive knowledge of emerging and mature technology platforms, and a pulse on tax regulatory and legal developments. Let’s plan your next move.
Digital assets are changing the game
Take your digital assets vision from plan to reality.
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