Cryptocurrency, Taxes–Earlier today EWN reported on a development by several different countries, including Japan, to impose more severe regulations and protocols for catching so-called “cryptocurrency tax evaders.” However, the approach of vilifying the group of investors, particularly in the broader context of this year’s market and the state of crypto regulatory oversight–or lack thereof–is sending the wrong message and will ultimately backfire for the bureaucracies that enact them.
For one, crypto taxation is unnecessarily complex. While traditional media outlets have had a proverbial field day publishing the abysmal rates of cryptocurrency customers actually paying taxes on their investment, a figure which could be less than one percent of the participating population, they fail to take into account the severe complexity of the current tax code. While taxing earnings from individual trades is somewhat part and parcel for the markets of stocks, the trading atmosphere for cryptocurrency, where thousands of trades can be executed by an average user in a single year given the minuscule transaction fees, does not lend itself well to the same penal code.
On Dec. 4, the government of Japan announced a new initiative to enforce crypto taxation, including the development of a system that would specifically track down evading individuals who refuse to pay. While it’s little surprise that a government would attempt to collect on the significant taxes being generated from cryptocurrency appreciation, particularly during 2017’s bull run that saw the currency jump from $1000 to near $20,000, it still sends the message that the majority of crypto traders are criminals as opposed to respected investors.
We have yet to see the impact of a more simplistic tax code in relation to cryptocurrency, and whether it would make an impact on the current unfavorably low rate of actual taxes paid on crypto earnings. On one hand, the community of cryptocurrency has set itself up for such scrutiny, given the decentralized and largely libertarian ethos surrounding the industry. With talk about the “dangers” of fiat and the government who control them, it’s understandable that tax services few their competition as outlaws attempting to evade and operate outside of the established system.
However, pushing crypto investors to jump through endless hoops of the ridiculous tax code, without even the attempt to find a happy intermediary, sends a message that governments are not willing to compromise. The end result has been an investment base that has little interest in complying, more out of paralysis than spite. While few are happy to pay taxes, particularly those gained through savvy investing, the significant deck stacked against most crypto investors is enough to have them bow out all together.
Rather than painting the crypto investment community as cheats, tax evaders and criminals, governments should seek to find a more simplistic means for collecting taxes on crypto gains. The current model, which asks investors to calculate appreciation on individual trades from the thousands of currencies across the market, is not a conducive means for compliance, and fails to take into account the nature of the cryptocurrency industry and the way most traders operate.
In addition, simplifying the tax code for crypto shows a willingness on behalf of governments to take the industry seriously as a digital asset and newly emerging landscape, as opposed to the current discourse which treats crypto investors as second class citizens.