How cryptocurrency taxes are hurting the economy
How cryptocurrency taxes are hurting the economy

How cryptocurrency taxes are hurting the economy

By Giorgi Mikhelidze - 10 Aug 2019

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Taxes on cryptocurrencies are slowly but surely being pushed into the background without having market experts make serious comments on them.

However, no comment has ever convinced the government to change its ways when it comes to finances and economics, therefore there are other methods required to make a serious change.

But before that change is made, the government needs to be convinced by the mistake that’s being made through the taxation of cryptocurrencies. The tax in question is the crypto capital gain tax, which basically identifies a crypto holder in the country, and based on their profits, demands compensation to the government.

Crypto tax evasion cases

One of the primary products of the government’s tax regulations isn’t usually the additional value or economic growth from the funds they receive from crypto holders, but the issues of maintaining and finding crypto tax evasion cases all over the country.

Naturally, we all know that whenever a law is introduced in a country it needs to be enforced to the fullest extent possible, or else the government is risking its political power and various other psychological moments from the population.

The nature of cryptocurrencies makes the governance of crypto tax extremely hard to track. Having a decentralised asset and trying to convince a company to give out information about their customers when they’re not obligated to do so is virtually impossible.

This is one of the reasons that we see a very common recurring theme all over the world in terms of crypto tax. There are currently only two types. 

  • Type 1 focuses on delegating the responsibility of reporting customer activity directly to the companies which add operational costs;
  • Type 2 is the delegation of tax reports to the traders themselves which pretty much begs people to avoid it by any means necessary.

Type 1 crypto tax

The first type of crypto tax is located in mostly Commonwealth countries. Commonwealth countries are jurisdictions like Australia, New Zealand, the United Kingdom, Canada and etc. Pretty much anything that used to be a British colony in the past (besides the United States and India) have this type of crypto tax laws.

As already mentioned in the above paragraph, this type of tax focuses on delegating the responsibility of monitoring the state-introduced law to the companies servicing the population themselves.

Meaning that they will need to hire additional staff to monitor trades and compile all of them into a comprehensive database and make monthly reports to the country’s tax agency (which is the agency usually tasked to enforce the law).

Should they fail to do so, and let’s be honest, it’s not that hard to do so in a decentralised market, they could face serious fines.

How traders avoid Type 1 crypto tax regulation

Avoiding the first type is extremely easy for crypto holders. What they do is they simply start trading with a company that is either not located or licensed in their home country.

This provides the entity the reasoning to not cater to the local government’s demands for data, as they are not obliged to. The government doesn’t have the right to ban their services in the country based on this factor, therefore the exchange itself does not face any issues.

The clear direction that the government is forcing their local population through the crypto tax should be obvious. Having a small number of traders in a single country forced to use foreign services is a major hit to the profitability of local crypto exchanges. This warrants a decrease in the corporate tax generated from local crypto exchanges.

Basically what happens is that the government, in pursuit of crypto capital gain tax, risks the corporate tax on local crypto exchanges, potentially reducing their tax revenue completely.

Cases with type 2 crypto tax regulation

The second crypto tax policy is a little bit more involved from the trader’s side. This regulation delegates the responsibility completely onto the traders themselves, therefore they need to calculate it, determine it, file it, and pay for it.

One of the most notorious jurisdictions that enforce this law is the United States of America, which has already been receiving criticism from its population due to the complexity of taxation in the country. The crypto tax is just salt on the wound.

Anyway, traders under these laws have a very easy direction towards avoiding it completely. They can simply not file the taxes and debate their participation in the crypto market by diversifying into privacy coins. The transaction will rarely be disclosed if they use a foreign entity, therefore the prosecution will have little to no evidence against them.

Those who remain on local exchanges though have already received letters from the US Revenue Service to pay the due tax as soon as possible. With these cases, there is very little a trader can do, as they’ve already been identified.

In other cases, if the traders want to cash out their profits, they use third-party payment providers or other companies that accept crypto payments. Companies like PayPal, Skrill or Neteller have started to adopt crypto payments, which facilitates traders to use these platforms as liquidity providers for their crypto holdings.

Once they’ve liquidated the assets, they transfer them to various platforms that accept cryptos. This could be video games, online wagering websites, e-commerce stores or anything in particular.

After maintaining the funds on these platforms for a few days and sometimes weeks, they start withdrawing them bit by bit, in order to stay under the maximum “investigatable” amount.

There is currently no framework against these types of actions.

Crypto tax is hurting the economy

As already mentioned earlier in this article, the taxes on cryptocurrencies are much more of a hassle than they’re worth for the government that is enforcing them.

The operational costs of creating new agencies or task forces drain it from resources, while not providing pretty much anything in return. In fact, it drains it even more from revenue sources through a corporate tax on local crypto exchanges.

The best route for the local authorities would be to completely remove any and all types of crypto capital gain tax and allow the local population to utilise local crypto exchanges. This way, these companies will get much more traction, therefore more revenue, and in the end, will pay more corporate tax.

If it’s not the exact amount we can move over to the customer spending argument. The more funds citizens have in a country, the more open they are towards spending it on consumer goods or any types of investment such as real estate.

By removing the crypto tax, the government will increase consumer purchasing power in the country and potentially provide resources for local companies to grow at a much faster rate.

The growth of corporations in a country always translates into more corporate tax, therefore more revenue, larger budgets for the future and a healthy economy overall.

Giorgi Mikhelidze

Giorgi is a Georgia software developer with two years of experience trading on the financial markets. He is now working to spread the knowledge about the Blockchain in his country and share all of his findings and research to as many crypto enthusiasts as possible.

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