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Taxes, a dreadful word indeed. You never know where it is going, but you still have to give it anyway. This was a major problem for people a couple of years ago. Making a business was becoming more and more challenging. The 2008 crisis took a major hit on the world economy, and the last thing people wanted to do was pay taxes. Well, there was one alternative that everybody could try, and it was crypto.
Being paid, or even making payments via Bitcoin, helped you avoid any unnecessary taxes from the government in the grand scheme of things. For an extremely small transaction fee, you could save hundreds of dollars. And also avoid the confusing mess that are tax returns. However, this was available back when cryptocurrencies were known to only a handful of people, most of whom were either taking part in the development and production, or mining, of cryptos. Once it became extremely popular, the governments started noticing.
The damage that is taxation
Taxes are very important for a country to stay afloat, but for an individual trader or an industry, it disrupts proceeding on quite a significant scale. After governments have sorted out their confusion with blockchain technology and implemented tangible regulatory frameworks, we may start seeing taxes being imposed on both profits and transactions of cryptos. There are a couple of reasons why that is terrible news. Well, for one, you get less than what you traded for, and the transactions become even more expensive.
The other problem, however, is far more significant. Increasing taxes on cryptocurrencies and crypto companies will damage the balance of power within the industry. Thanks to the crypto winter, very few companies are able to stay alive, so to speak. Adding taxes to their costs will only make them disappear. But, one thing to consider here – not all of them will disappear, naturally. All of the large companies out there will be able to just lay off staff and cut costs, and they’re good to go. However, smaller companies will be unable to keep up. This will narrow down the choices for crypto traders to a select few exchanges and companies, which is never good for business, as there will be fewer options.
More than enough to learn from
The same thing can be seen with any other industry. When the taxes go up, the big players tighten up and cut costs, but the underdogs lose too much and are not able to keep up. The most prominent case is the Forex industry, where the cost of operation and competition is so high that creating a new brokerage requires millions upon millions of investments – plus the rigorous competition with already established regulated Forex brokerages.
This does nothing but discourage innovation. At this point, the large companies just simply cannot be challenged, and the smaller ones can’t get enough capital to innovate and compete. And so, the crypto sphere may fall into the same loophole of “status quo” as other financial markets. And once a specific technology stops being innovative and new, it dies off extremely quickly.
How to approach taxes
It is a fact that cryptocurrencies will soon be regulated all over the world. Taxes are sure to follow the new framework, but how can governments approach it on a degree that doesn’t hurt the industry, but on the contrary, helps it? Well, we need to look at European city-states and small countries at this point.
Liechtenstein, Monaco, Luxembourg, etc. have all become financial hubs of their respective regions for one very simple reason. Their tax rates are significantly lower than their contemporaries, which makes them a primary destination for any company trying to make a foothold in the region. Most companies that want to assimilate into the European market and also keep costs at a minimum usually flock to small city-states. The number of incoming companies has been quite high, therefore the revenue has still remained high. This is what we are seeing with Gibraltar in terms of cryptocurrencies. They were one of the first to conform to cryptocurrencies, which made them a regional hub of the industry.
Once the crypto tax is in place for most European states, countries like Gibraltar are going to benefit most, even if they keep their taxes extremely low.