Bitcoin, the world’s largest cryptocurrency, was first introduced in 2009. Since then, the cryptocurrency market has exploded: dozens of exchanges process billions of dollars in transactions each day, across thousands of different cryptocurrencies.

But how can tax authorities collect the related tax revenue? The crypto market is an opaque and technically complex system, representing a new obstacle for tax authorities in the ongoing challenge of the shadow economy. 

At IVIX, we build technology that helps tax authorities gain visibility into the shadow economy. We recently published a new report that uncovers capital gains in crypto, leveraging publicly available data to reveal that US Bitcoin traders realized $30 billion in capital gains in 2021. 

In this blog post, we’ll discuss our methodology and key findings. 

Click here to download the full report: Crypto Capital Gains by US Persons

How Can You Measure Capital Gains in Crypto?

For our report, we analyzed transactions on the Bitcoin blockchain. We focused on Bitcoin because it’s by far the most popular cryptocurrency, with almost 50% of the total market cap at the time of publication. To conduct our analysis, we: 

• Built tools for estimating characteristics such as transaction size and capital gains from transaction data from the Bitcoin blockchain. 
• Set up Bitcoin nodes to capture additional information directly from the blockchain, such as the volume of nodes in a certain geolocation. 

While deposits and withdrawals from exchanges are documented on the Bitcoin blockchain, transactions within an exchange are only documented on that exchange. We addressed this problem by collecting data from exchanges themselves and by monitoring changes in the market capitalization of stablecoins, which are used primarily by market makers to cash out of crypto and can thus serve as a rough proxy for crypto gains. 

We validated our findings by cross-referencing other publicly available data, such as reports and data provided by industry, media, and other OECD countries. 

How Big is the US Crypto Market?

The US crypto market is very active. We discovered that the US accounts for approximately 20% of the world’s crypto transaction volume. An estimated 6-8.3% of Americans own cryptocurrencies.^, Despite the popularity of crypto among retail investors, we found that more than 90% of transactions on the blockchain were $10,000 or more.

We estimate that less than 1% of the US population has a Bitcoin wallet that contains more than $500 USD. (We arrived at this estimate by identifying approximately 9 million wallets with more than 0.01 BTC, around $500 USD. Assuming that a maximum of 3 million of these are owned by Americans, that amounts to less than 1% of the US population.) This is because most retail activity takes place on exchanges, and retail investors generally use their wallets only to move crypto in and out of exchanges and the traditional banking system. 

How Much Did US Bitcoin Traders Make in Capital Gains in 2021? 

We estimate that US persons realized a total of $30 billion in capital gains related to Bitcoin in 2021. 

This estimate is based on: 

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• The value of Bitcoin transactions on the blockchain: The average per day volume of Bitcoin transactions, excluding change, was approximately $5.2 billion — representing an average of 265,000 transactions, so tracking every transaction was computationally challenging. We instead statistically inferred that the average capital gains for a transaction were around 5% in 2021, meaning that the worldwide capital gains for Bitcoin were $95 billion. 
• The ratio of Bitcoin to other cryptocurrencies: Bitcoin accounts for 40-50% of the value of cryptocurrencies. We used the more conservative 50% figure, meaning that worldwide cryptocurrency capital gains were $190 billion.
• The geolocations of Bitcoin-related activity on the blockchain: We found that 26% of the IPs active on the blockchain were US addresses. Adjusting for Tor endpoints and proxies and removing IP addresses belonging to cloud providers, we estimate that approximately 17% of the transactions are done by US addresses.
• The growth in Tether and USDC money supply: In 2021, Tether grew by $45 billion, USDC grew by $44 billion, and Binance-USD grew by $13 billion. This puts the minimum possible value of worldwide cryptocurrency realized capital gains in 2021 at $103 billion, and US gains realized just in stable currencies at 17B USD. Under the very conservative assumption of 1:1 ratio of USD to stablecoins (in Kraken, for example, the ratio is much higher) this brings us to capital gains of approximately $34 billion. 
• Historical data on the effective capital gains tax rate: We assumed an effective tax rate of 18% on the cumulative $30 billion. 

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We verified our analytical conclusions by cross-referencing other publicly available data, such as reports by Chainalysis. Our estimate of $30 billion in Bitcoin capital gains in the US may seem conservative when considering how rapidly Bitcoin’s market cap has grown — from $0 to a peak of $1.2 trillion — since its introduction in 2009. The relatively small volume of capital gains implies that many investors are sitting on profits. In the event of a shift in the market climate, long-term investors are likely to cash out, leading to a substantial increase in capital gains.

While the current NFT market is much smaller, it is growing rapidly, from a $340 million market cap in 2020 to a $40 billion market cap and trading volume of $25 billion in 2021. We estimate that 20% of these transactions were by US persons. Most of the market growth happened in 2021 and involved primarily capital gains transactions, leading us to an additional $1 billion in taxes related to NFT transactions in 2021 alone. As the market continues to grow rapidly, we expect a much higher volume in 2022. 

What Does This Mean for Tax Authorities?

The crypto market in the United States is large and growing quickly. Strengthening reporting, particularly of capital gains, has the potential to provide significant additional tax revenue. Governments that use data to develop policy and technology to support compliance will achieve the most success.

In our next blog post, we’ll explore the challenges tax authorities face in collecting revenue from crypto markets and provide recommendations for improving compliance. 

Transform Metaverse Compliance with IVIX

Crypto is becoming increasingly mainstream as NFTs and the metaverse grow rapidly. Tax authorities around the world are using IVIX to ensure that NFT traders and metaverse businesses comply with the tax code. To learn how our platform can help you, click here to book a demo.

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