How Do Governments Fail At Imposing Crypto Tax?

How Do Governments Fail At Imposing Crypto Tax?

Every government has its tactics and strategy for approaching cryptocurrency taxations, but many of them fail miserably to achieve the goals that were set out in the beginning.

All of this stems from the nature fo the tax, and how sometimes it is completely irrelevant. In most cases, we see the local crypto community reject taxes or deliberately avoid them because cryptos are not classified as tradeable assets, therefore avoiding tax on them isn’t mentioned as illegal in the legislations.

But the governments still impose taxes on income and capital gain, which do affect crypto gains no matter what they’re classified as, therefore the crypto community had to find alternate means of avoiding the watchful eye of the government.

Why do tax regulations fail?

In most cases, the introduction of a cryptocurrency tax is something incomprehensible for the traders, as they rarely imagine the two words coexist together. Taxing something that is decentralized is very rare in developed countries, therefore the understanding of it sometimes flies over the heads of the investors.

Some governments don’t even bother issuing guidelines how to actually pay the tax, therefore most traders who are ready to do it, get lost in the documentation and inadvertantly avoid it.

What do tax regulations look like?

In most cases, the government tries to avoid any additional costs or manpower to dedicate to the crypto industry, therefore the most common taxes we see are dependant on the community’s “sense of responsibility”.

The very first legislation required cryto holders to reveal themselves and report on their gains from trading cryptos like Bitcoin and other large altcoins. Naturally, this type of regulation did not bear any fruit as people simply didn’t show up. And the government couldn’t do anything about it, it’s not like crypto transactions are easy to track.

The next version of a crypto regulation shifted the responsibility onto the crypto exchanges located within the country. Every customer’s trading history and gains needed to be disclosed to the government so that they could tax them accordingly.

The community found yet another way to avoid these issues, by simply registering with an offshore company. Most Americans avoided Coinbase and went for Binance inster, and vice versa.

Since Binance wasn’t under the direct jurisdiction of the USA, they weren’t required to disclose such private information. This is the regulation that most countries are sticking to at the moment.

How did the traders avoid transaction tracking?

No matter how much a trader may try to avoid taxes by using a foreign crypto exchange, they will still have to cash out onto either their bank accounts or credit cards, which will ultimately lead to the government discovering the transactions.

Therefore, some kind of additional liquidity provider needed to be found. Fortunately for most traders, other, traditional financial markets started to accept cryptocurrencies as deposits. Due to such an offer, the crypto investors were given a source to cash out, as well as diversify their investments into other assets.

In fact, according to this TDS Capital review, nearly 10% of all customers were opting for crypto depostis rather than relying on fiat currencies. Furthermore, many traders were already aware of these companies, due to their offers of CFDs on cryptocurrencies.

Those who weren’t were prone to use other liquidity providers such as gaming websites, ecommerce stores thataccepted crypto and many more eWallets like Skrill or PayPal.

All they had to do was connect their cold or hot wallets and simply make the transaction. The funds would later be diversified into various industries, with only a fraction of their entire amount being diverted to the bank accounts of the users, which, in fact, were not classified as income, but personal transactions, therefore, not having to face income tax.

Crypto taxes around the world

As already mentioned, every country has its way of dealing with cryptocurrency taxes. Some enforce it, while other are a lot more light-hearted towards the digital currency.

The crypto tax landscape looks something like this:

  • The first and most common tax is within the 1 to 52% range. It can be seen in countries like Germany, Spain, Italy, Norway, Japan and others.
  • The second most commont tax is a bit harder to come by. But quite a lot of developed countries opt for it. It can be found it countries such as the New Zealand, France, Australia and South Korea.
  • The final tax policy, which is a little bit distorted, is called the mixed policy, which is very rarely subject to bein enforced. It can be found in countries such as Austria, the United Kingdom and Singapore.

However, there is one country that I’ve listed above that takes the crypto taxing regulations to a whole new level.

The crypto tax laws in South Korea

South Korea is a very crypto friendly country when we first look at it. But it takes only an hour of research to find out that the local government is keeping the blockchain industry right under its nose, as it controls nearly everything about it.

The companies are given specialised licenses. The ICO market is completely banned, and the crypto tax regulation is on a completely different level when compared to other countries.

South Korean crypto traders are banned from making any type of anonymous transaction, and are required to use their IDs for crypto taxes.

Should a known crypto trader not report anything on his crypto trading activities during the month, but be caught red handed, the punishment could range from 100% seizure of the evaded tax, charges on money laundering and even jail time.

Needless to say, even such a strict industry has its loopholes and South Koreans have been utilizing them for years now. Most of them are the ones listed above.

Is crypto tax a good idea?

Crypto taxation has been opposed by the blockchain community by quite some time now. Ever since the first notion was made about giving cryptos a capital gain tax legislation, some of the most popular influencers in the industry have been spearheading the argument about removing the tax.

One of the most important arguments is that the government is depriving their population of additional income, and is not benefiting from the tax as much as it would if they simply allowed untaxed trades.

Here’s a very simple example. Even with the strict tax regulations, the government is expected to maybe get half of the expected amount, due to ever-evolving evasion tactics. However, if they simply removed the tax laws, they’d increase the consumer purchasing power within the country.

This would lead to crypto traders simply spending their gains on things like real estate investments, more goods from local companies, investment diversification and etc. In the end, those taxes would still end up at the government’s doorstep through grown companies’ revenue tax.

With that apporach, the government would get 100% of the tax they expected from crypto trading, while with the law, they get around 50% at best.

Even though this notion makes sense, it’s highly unlikey that the authrorities will listen, because if cryptos don’t get a capital gain tax, than neither should Forex, strocks and any other asset.

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