This article first appeared in Wealth, The Edge Malaysia Weekly on June 23, 2025 - June 29, 2025

Let’s jump right into the facts. According to a recent paper published by the National Bureau of Economic Research, one of the most influential global think tanks on public policy: 

• Eighty-eight per cent of crypto investors either choose not to or fail to declare tax. This is a much higher rate compared to other sources that typically go un(der)-reported such as self-employment income, foreign income and foreign real estate;

• The vast majority are young (aged below 30), male and urban individuals. This specific age-gender-location profile would over-index on non-compliance compared to any other demographic, and it seems to be universal across jurisdictions; and

• There is a composition effect from one dominant trait: Three out of four non-compliers trade exclusively in foreign-based digital asset exchanges (DAX), or they avoid domestic ones that provide information to tax authorities. 

For many crypto degens (a slang term for “degenerates” that describes individuals who engage in speculative trading or investment strategies) out there, this data does tell them anything they do not already know. It is not the evasiveness of crypto as an asset class that is alarming (so are cash and gold, in all seriousness), but how pervasive it is being used for this purpose. It is like the unspoken feature of crypto that sells by itself without stating the obvious.

Last year, Malaysia’s Inland Revenue Board (LHDN) claimed to have identified several “individuals engaged in high-volume transactions who are not reporting these activities”. It went on to raid 10 target locations in the Klang Valley as part of an inter-agency special ops, and commandeered mobile devices and computers used for crypto trading — after which “very significant” amounts of evasion were uncovered. 

How big is this stealthy group that trades offshore? While no concrete intel exists, we can refer to market research commissioned by the UK HMRC (His Majesty’s Revenue and Customs, a counterpart of LHDN) as a proxy. 

Around 22% of crypto investors are predisposed to trade in foreign DAX, many of whom are large traders, or “whales”, with outsized margin facilities and derivatives exposure (which are not offered on Malaysian DAX). What’s more, nearly half of this group also use decentralised exchanges (DEX), where traders are neither documented nor “due-diligenced”. This is astonishing because when compared to the entire market, only 8% have ever heard of or interacted with DEX before. DEX platforms are typically unregulated or unregulatable, depending on how you argue it. 

Wait, the plot thickens: Based on cluster analysis, this same group also happens to be the most tax-relevant and tax-informed. In other words, these guys know what they are doing and they have the goods! When you make a back-of-the-envelope calculation with the number of traders on Malaysian DAX (reported as more than 840,000 in 2024) and daily trading volume (mean of RM20.3 million for 2022 and 2023), you can probably quantify this group. Assumptions apply.

Be that as it may, not everyone who trades overseas is an evader. There may be investors who do not owe taxes in the context of capital gain rules in this country or due to foreign-sourced income exemptions, if any, and some of the ones who do may owe too little to justify the cost of enforcement. The tax administration would want to maximise efficiency and judiciously target the heavy hitters such as whales, sharks and what-nots.

Enforcement can take broad forms of intervention, including sending reminder notices to taxpayers who trade on DAX or previously declared crypto income but stopped, or direct requests for audit of documents such as capital statements.

In the US, the Inland Revenue Service (IRS) has served what is known as “John Doe” summons on DAX to reveal identities of unknown US taxpayers transacting above US$20,000 a year in crypto. At one point, the IRS even proposed a mandatory requirement for taxpayers to disclose their wallet addresses and transaction IDs in the tax return form. Several jurisdictions, including Australia, Canada and the European Union, are also demanding them for verification and visibility. While it is not practised here, LHDN’s crypto guidelines emphasise the importance of keeping clear transaction records for tax-compliance purposes.

Without proper targeting, it might end up being a wasteful fishing expedition. Studies have shown that audits to recover unpaid taxes need to cost less than a few hundred US dollars to be worthwhile. At least based on one example of a developed economy, the lower and upper bounds of the average crypto tax liability of non-compliers are US$200 and US$1,087, which means the audits have to be optimally focused on profitable segments such as those in higher income bands.

How do you obtain information on taxpayers of interest who trade on foreign DAX? While Malaysia has implemented the Automatic Exchange of Information under the Common Reporting Standard (CRS) since 2018 to share financial data of taxpayers, it is mainly for banks and does not extend to DAX. Banks serve as a third-party tax reporting system so that the authorities do not have to rely on voluntary self-assessment, which may not be as reliable. But since crypto transfers do not go through banks, such information cannot be obtained and shared. 

All this is set to change soon with the Crypto-Asset Reporting Framework (CARF), an expansion of the CRS to collect crypto-related data for global tax transparency. Malaysia has committed to its implementation, according to an OECD (Organisation for Economic Co-operation and Development) update on March 2025, along with 60-plus jurisdictions. This will require all new and existing DAX users to self-certify their valid tax residency (including tax identification number and controlling persons) if they wish to continue trading. DAX, both local and foreign, will have reporting obligations to tax authorities within the scope of relevant transactions and digital assets including stablecoins.

According to the Malaysian Digital Asset Platform Association (MDAPA), which represents domestic DAX: “Our industry members are aware of the CARF and Malaysia plans to implement this in 2028. Looking at the objectives of the CARF and how other countries have approached it, we understand implementation is likely to be a cross-collaborative effort between multiple government agencies and the digital asset industry.” 

Meanwhile, MDAPA is monitoring the development in Singapore and the UK. “While it is still too early for specific actions in Malaysia”, it says, the industry is ready to work closely with regulators to “explore how this can be implemented systematically across our industry — [by] balancing innovation and compliance”.

Anonymity has long allowed crypto investors to conceal their identities under the guise of personal privacy. However, this is no longer feasible under tax laws: While cryptocurrency can function like any other economic activity under the principle of neutrality, its participants cannot hide their identities.

With the advent of artificial intelligence (AI) detection tools trained on blockchain ledgers, tax investigations can be done with incredible accuracy, intricacy and speed — which local authorities have adopted. AI has gone so far as to expose crypto tax evaders who used shell companies to make under-the-table payments for undervalued imports, conceal revenue, filter transactions, convert them into multibillion-dollars’ worth of crypto, and then launder it abroad (Operation Niflheim in Brazil).  

In a de-anonymised crypto economy, tax dodgers will shift to the remaining holdouts.The sheer complexity of decentralised finance (DeFi) products (structured as “hybrid instruments”) is going to keep tax consultants and litigators busy into the next decade, while divergent tax treatments (for example, whether stablecoins are “property” or not) and rates across jurisdictions (from 0% to 45% in Asia) mean that arbitrage is likely to exist. And as crypto grows as a source of revenue, governments may also enlarge their indirect tax regimes to cover crypto activities as provision of digital services.

Those who continue to hide will risk being found out eventually. After all, blockchain records cannot be erased and are publicly viewable. But those who seek will find that there are rewarding tax optimisation strategies out there. Here’s to many happy (tax) returns!

Edmund Yong is managing partner at Celebrus Advisory, a digital asset consultancy, and a Global Blockchain Business Council ambassador to Malaysia

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