How transparency shapes tax policy effectiveness: Evidence from cryptocurrency markets

Abstract

We investigate how transparency—crypto exchanges' verification of trader identities through Know-Your-Customer (KYC) and their transmission of trader and transaction data to tax authorities—shapes the effectiveness of tax policies in cryptocurrency markets. Using regulatory events and cross-exchange price variation, we provide initial global evidence that transparency amplifies the capitalization of statutory crypto-tax liabilities into prices. In the United States, Bitcoin prices on exchanges subject to new tax reporting obligations fall by an average of 0.34 % following announcements that raise expectations of information transmission, even without changes in statutory tax liabilities. Across jurisdictions, price declines are significantly larger where reporting systems are more transparent, and in cross-sectional analysis, exchanges that both enforce KYC and transmit information show the strongest price sensitivity to local tax liabilities, particularly where capital controls constrain arbitrage. These findings reveal a transparency–privacy trade-off unique to crypto markets and demonstrate how digital assets provide rare opportunities to test classic tax-capitalization theories under conditions of anonymity and regulatory heterogeneity, with implications for the design of effective tax policies.