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Estimating Cryptocurrency Gap

I'm trying to do a rough estimate for the tax gap for cryptocurrency in Canada and I'm having a hard time producing it due to a lack of data on the topic. The tax gap is the amount of tax not paid that should have been paid, so it's a type of measure of non-compliance with tax laws. In Canada, crypto assets are taxed when they are disposed of. They are taxed under business income or capital gains and could also be taxed under GST/HST. Business income tax applies to the full amount and capital gains tax applies to only 50% of the amount.

I am new to cryptocurrency and not quite familiar with the best data sources to look at. So far, here are my ideas to give a rough estimate of a possible upper bound for the tax gap:

Given that x% of the global cryptocurrency market is based in Canada, approximately $y in crypto transactions can be sourced to Canada. Under a very extreme assumption that all Canada attributed volume reflects unreported income taxable at the top rate of z%, cryptocurrency would contribute roughly $(zy%) to the tax gap, with the actual tax gap value being much lower. This $ (zy%) would serve as an upper bound. There are obvious issues with the estimate, hence why it is a very rough estimate.

To do this estimate, I need to figure out what the values of x% and $y are. Any suggested data sources to look at for this?

If anyone has suggestions of how I can formulate a better upper estimate or approximate a lower bound estimate, or if there are any good data sources to look at that could help me formulate a better estimate, it would be appreciated.

Thank you!

1 Answer 1

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Since Bitcoin is a global network without user registry or other user telemetry that is designed to provide cash-like financial privacy, it is inherently difficult to:

  • measure user counts
  • assign transaction activity to specific users
  • identify users
  • allocate user activity to specific jurisdictions
  • classify transaction activity by purpose
  • even notice transaction activity at all when e.g. performed on second layers such as the Lightning Network or between accounts of financial services

Your best bet might be to look for survey results, business data provided by Canadian services, or figures published by academic or industry researchers.

Progressing beyond something that would classify as “very rough estimates” should take considerable research effort, maybe on par of a thesis rather than a few hours here or there.

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  • I'm trying to start with a rough estimate but I do intend to put in a lot of effort into trying to develop a closer estimate. I have a background in math/stats so I have many ways to try and develop an estimate; however, I am struggling to find data and solid statistics. I'm new to cryptocurrency, so I am wondering if I'm approaching my research incorrectly and if there is other available data out there that I can work with
    – eddie
    Aug 5 at 15:39
  • No, your approach sounds reasonable, it's simply that this sort of data is inherently unavailable with the exception of prior work by other groups that have published their own research. There seems to be some data on Statista for example, and there might be more in the context of e.g. parliament hearings about cryptocurrencies. Sorry, I'm not based in Canada and have not looked into data specifically for Canada before.
    – Murch
    Aug 5 at 15:48

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