How Governments Fail at Imposing a Crypto Tax

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The impact of cryptocurrencies on our daily lives and the way our society engages in the financial discussion has already been discussed many times; therefore, making a special announcement about it is redundant.

However, talking about the way people utilize cryptocurrencies for not-so-legal purposes needs to be addressed. Cryptos have long been used for money laundering purposes and for purchasing goods on unauthorized websites and markets. However, all of that quickly got squared off with regulatory frameworks from most countries. What remains is the usage of cryptos by a single individual to avoid taxes on capital gains. But that doesn’t mean that the capital gains tax itself isn’t at fault.

The problem with taxes

Most people get confused when they see the words “taxes” and “cryptocurrency” together, as most countries do not classify cryptocurrencies as tradable assets. In fact, most countries don’t classify the coins as money.

Therefore, it’s quite bizarre for most traders to pay taxes on something that’s not even in the legislation.

Most regulations deal with crypto taxation in a very relaxing manner, relying on citizens themselves to report their capital gains on Bitcoin and other cryptocurrencies. In most cases, about 5% of the crypto holding community in a particular country makes accurate reports.

The overwhelming majority either hides their holdings completely or simply deducts a large amount.

Even though fewer taxes mean more funds for investors, it means something completely different for the government. First things first, it’s a loss of funds, and second, it’s disobedience.

No matter how you look at crypto taxes, the law must be enforced.

How governments deal with tax evasion

The only way governments can tax cryptos is to first find out who owns them, how much they own, and how often they use it for payments and cashing out.

Many countries quickly found out that crypto traders were commonly cashing out their crypto profits on traditional financial platforms. Places like Forex and CFD platforms were all game.

In fact, according to this UproFX review, nearly 10% of a broker’s customer base preferred crypto payments as a means of deposit. This was happening more in the EU region, as regulations kept tightening and traders wanted to find loopholes and use the benefits that were being banned across the continent.

This was naturally hard to deal with for the governments, as they themselves didn’t understand the industry to a point where realistic rules could be implemented. As already mentioned, the citizen accountability method didn’t quite work as people didn’t see the crypto tax as necessary or fair.

Therefore a number of amendments were made to the regulation. For example, Australia started holding its local crypto companies and exchanges accountable for reporting trader activity. Through those reports, at least some percentage of a tax could be calculated. But everybody had different percentages.

• The first variation is the income tax on individuals as well as corporations. It ranged from 1 to 52% in countries such as Germany, Argentina, Netherlands, Japan, Italy and Spain.
• The second type is the capital gains tax which ranges from 10 to 36% in countries such as the United States, New Zealand, South Korea, Finland, France, Brazil, Australia and various small Asian states.
• The final version is the mixed tax approach, meaning that combining tax law is implemented for all tradable assets and deducted according to transactions. This can be seen with the United Kingdom, Singapore, Sweden, Austria and Greece.

Although these laws had some effect on the overall tax revenue in these countries, the result was definitely not what the countries expected. Traders still found loopholes such as transferring their funds on foreign companies’ platforms. Then cashing out using places like gaming platforms, or using third-party e-wallets as their liquidity provider.

In order to cover such a large number of liquidity providing platforms, the governments would need to implement an extremely restricting regulation. Which would in essence ban cryptos from being used as decentralized assets, ultimately removing its sole purpose.

The most severe cases

The most severe case with cryptocurrency taxation can be seen in South Korea, which requires ID verification from all crypto holders in the country. This was enforced by banning anonymous transactions within and outside of the country.

If you tried to make a transaction but had not gone through ID verification, you could very well face money laundering charges.

But thankfully, it seems like the South Korean government is going back on their decision to implement this feature, as the country’s crypto industry has gone downhill ever since then. In fact, it shows why taxes should not be imposed in the first place.

Why crypto tax is ridiculous

When implementing a crypto regulation, the government has to make a choice. They either commit to the tax legislation, and hope to acquire at least 40% of the designated amount, or simply ignore the tax law and allow their citizens to acquire more purchasing power.

Countries like South Korea, USA, UK and various other developed states would benefit much more from the added purchasing power of their local consumers, rather than just simple taxation.

For one, it’s an income that will most likely be distorted, therefore not all of it can be acquired with ease. In fact, the investment needed to ensure that 40% acquisition pretty much exceeds that 40% in the first place.

Next, what would that tax be used for? Infrastructure? Investments abroad? Partnerships? It’s not disclosed.

It would be much better to allow the consumers to have more purchasing power, thus fueling the local companies that will eventually pay the government taxes on revenue.

Overall, simply removing the crypto taxation law provides the government 100% of the tax goal, while the implementation of the tax law, would give them around 40%.