Government all over the world are considering the regulatory frameworks for cryptocurrencies as we speak. Naturally, those who have already implemented it have provided a crypto tax legislation alongside it, but it seems like none of these tactics are working.
The government is responsible for imposing regulation on any financial service so that it doesnít damage the investors themselves. In that aspect, nearly all of them have succeeded at some point, as fewer and fewer people are becoming victims of crypto scams.
However, it seems like none of them was able to hit the mark with crypto tax regulations, as more and more traders find ways to avoid it. This is largely due to the regulations not being compatible with a decentralized asset such as cryptos.
Why are people avoiding tax?
In most cases, youíll find arguments from the investors, saying that cryptocurrencies are not officially recognized as money or a financial asset, therefore paying capital gain on it does not make sense.
At some point, they are right. An item that is not classified as a source of income or a tradeable asset usually does not have any tax assigned to it. The only thing we can think of is the car tax that most European states have.
Another reason is that people simply donít understand how to include Bitcoin profits on their capital gain reports. Due to a lack of guidelines, many simply ignore it and just donít cash out their profits.
And the last reason is greed. Naturally, if somebody is presented with an option to avoid taxes and get away with it, they will take it. And the governmentís imposed regulation does nothing to prevent it. Most of the legislation is focused on the responsibility of the citizens themselves and not the companies, which provides this scapegoat for the crypto trader to simply not report his gains.
What do crypto tax laws look like?
There are two types of crypto tax law that the governments enforce. It is the civic responsibility and corporate responsibility modules.
The civic responsibility module depends on the goodwill of the citizen themselves and hopes that they will voluntarily report their capital gain on cryptocurrencies. Naturally, most people simply donít do this as they donít cash it out.
Actually, not cashing out the cryptocurrency helps it remain in the "untaxable" framework, thanks to the non-tradeable asset classification it has in numerous countries. As long as traders keep their cryptos on a wallet, they canít be taxed on any gains.
The corporate responsibility module is directed towards the companies offering crypto services. These could be any crypto mining company or a cryptocurrency exchange. The government simply relies on these companies to report the trading activities of their customers, so that sufficient tax could be calculated.
But there is a serious issue with this framework. It only touches the local companies and not foreign ones.
How people avoid crypto tax
In the case of the civic responsibility module, many people simply donít report or cash out their profits, as already mentioned. But a new trend has been on the rise lately when crypto investors simply divert their funds to a traditional financial company.
For example, some Forex and CFD brokerages have started to accept crypto deposits. This is usually used as a liquidity provider platform. The investors deposit their funds on the brokerage, then simply withdraw it on an eWallet, and then finally cash it out at a relevant ATM.
In fact, if we look at some broker reviews, weíll see that nearly 10% of the brokersí customers choose to deposit in crypto. This could be an indication that crypto traders are simply trying to diversify, but it could also be accounted to the tax evasion mechanisms.
When it comes to the corporate responsibility module, the traders have a much easier time. They simply donít use the local companies. Thatís why we see so many US citizens avoid Coinbase and go for exchanges like OKEx or Binance.
Not having their funds on a local exchange, means that their trading habits cannot be reported and documented legally.
Once theyíre ready to cash out, they go through the same process as theyíd go with the civic responsibility module.
What can be done about this?
There is no clear vision about a strategy to reduce the number of investors avoiding cryptocurrency taxes. The only real example of this is in South Korea, but the regulation there is so strict, that the whole essence of cryptocurrencies is sacrificed for the sole reason of taxation.
In South Korea, investors are forced to use IDs to clarify their taxes. Anonymous transactions are illegal, which means that any attempts of making such payment will expose the trader.
Another way the government can handle the cryptocurrency tax regulation is to simply get rid of it.
Yes, thatís right. The best way to deal with a cryptocurrency tax is to remove it from the regulatory framework completely. Hereís why.
There should be no tax
The current legislation for crypto tax is not effective at all. The government is lucky if they get at least 40% or 50% of the intended amount in taxes. This means that the resources they use for imposing such regulation are being wasted on just half of the results expected from the project.
Improving the process would require even more resources such as funds and manpower, and at that point, even a 100% gain will not be enough to cover it all. The best way the government to handle this is to allow the traders to enjoy their capital gain.
When a countryís citizen has more money to spend, theyíre more likely to spend it locally. Theyíre more likely to invest and strengthen the local economy. Local companies are likely to increase their sales because there is more money available for the customer base.
This is known as consumer purchasing power. The more power the consumer has, the more likely it is that they will either invest it somewhere or support a startup or an already established company.
Thanks to the increase in sales, the companies grow, which means that they start paying more in taxes to the government.
So, in the end, those tax that was intended on crypto capital gain, still go back to the government, and in this case, they get the whole deal, they collect 100% of it.
So by simply removing the legislation, we get a more liberal market, more purchasing power for the local consumer, larger companies with a better growth factor, a more reliable stream of revenue tax, decreased costs because a new commission is not required.
The only problem that this could cause is that Forex and stocks traders can complain about their taxes, and thatís why governments are reluctant to implement it. But the thing is that removing taxes on those tradeable assets will also boost the economy.
Overall, the best solution for the crypto tax evasions is the removal of the tax policy completely.