Why Are Crypto Tax Laws Not Working And How Can They Be Fixed?

The world has been taken by storm with cryptocurrency regulations and taxes. Nearly every single country has some type of crypto tax or banned the digitial currency completely.

Crypto Tax

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Unfortunately, though, not all of these new laws are working out as well as the authorities thought they would.

In fact, most of these laws are failing left right and centre, due to traders not complying or simply insufficient resources to enforce them. Why exactly is this happening? What type of mistakes are being made and how can they be improved?

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Q1 hedge fund letters, conference, scoops etc

Two types of crypto tax

There are exactly two types of cryptocurrency tax laws across the world. They don’t have real names assigned to them so we’ll have to manage it on our own.

The first law I like to call the citizen’s duty framework. It is a law that requests the traders themselves to report their capital gain on cryptocurrencies, take these reports to the local tax agency and be taxed accordingly.

As you might have already guessed, very few people commit to filling out their reports and then bothering to take them to an agency. In fact, it’s not even about being bothered, it’s about the consequences of not doing so. There are no real consequences, very few tax agencies enforce the law to the extreme, one example of such is South Korea, but the IRS in America virtually ignores tax evasion on crypto capital gain, and the people don’t even bother.

The second law I like to call the company’s duty framework. With this law, the government is requesting the crypto companies and exchanges to deliver information about their customers’ crypto trading habits.

This is much more manageable as a large company can’t really avoid it, and it’s much easier to enforce. However, these companies are also struggling to report too much as most of their clientele are from abroad, which aren’t really taxable by the local government, are they?

So now we know what’s going on, now let’s see how these people cheat the system and avoid these taxes.

How people avoid crypto tax

Citizen’s duty framework

The first batch of crypto investors, that are under the citizen’s duty framework employs the help of third party companies. Companies such as online gaming websites, eWallets, investment platforms and etc.

Currently, the most popular platforms to use for avoiding the government’s attention are the Forex and CFD brokerages in several countries. According to this Libramarkets review, nearly 10% of a company’s customer base is willing to make deposits in cryptocurrencies, if the platform allows it of course.

This helps the traders to not only avoid the watchful eye of the taxman but also to diversify into different industries.

Usually, it’s much more complicated with at least a couple of transactions here and there before the trader is ready to cash out. It usually happens by sending the crypto to a third party platform, then sending those funds over to an eWallet, and then finally cashing it out. It’s a long process, but people still do it.

Company’s duty framework

Those under the company’s duty framework, have it slightly easier. They still need to go through the process of cashing out their profits in a similar way as displayed above, but avoiding local crypto companies is pretty much enough for them to avoid the tax completely.

That’s why we see such an overwhelming majority of American traders go for Binance instead of Coinbase. Binance is not required by law to report customer trading habits, while Coinbase is due to its location in the US.

But once a US citizen needs to withdraw from Binance, he or she still goes through the several transaction processes to cash it out.

How are governments reacting?

In most cases, you won’t find too many news pieces about a specific country’s government arresting or charging a citizen with crypto tax evasion, as it is very rarely discovered.

The latest case that was recorded was the Israeli court fiasco, where a company owner had to pay millions in crypto tax because it was classified as a tradeable asset on the spot.

The first thing that governments struggle with is the classification of cryptocurrencies. Most don’t recognize that it’s a tradable asset, or money or anything like that. Most see it as a hobbyist thing, therefore classifying it under capital gain tax becomes quite hard. And the enforcement itself is even harder.

Next is the anonymity of transactions. It got so hard for South Korea to track them, that they outright banned anonymous transactions and require citizens to provide their IDs for making one.

What should be done?

In order for the government to handle cryptocurrency taxation on a much more efficient level, it’s best to simply get rid of it.

Yes, that’s right, getting rid of cryptocurrency taxes is the best way to create a new source of revenue through cryptocurrencies for the government.

If we look at it, the two frameworks are quite flawed. Both of them have their own mishaps here and there, which leads us to believe that a large percentage of the taxable capital gain on cryptos is being unaccounted for.

Furthermore, there are some resources being directed to enforcing this crypto tax law, which drains other segments. Overall, it’s really not worth it for the government to spend so much on gaining a few million in crypto taxes.

The best case scenario would be to simply revoke any tax laws, in order to get 100% eficiency from the system.

Let’s explain.

By taking away the crypto tax, the citizens will have much more spendable income, which will directly translate into local consumer purchasing power. The larger the purchasing power, the more likely for the citizens to spend it on local goods and services, or diversify into various investments such as Forex, CFD or even real estate.

This ensures that local companies will have much more income over the course of several years. Larger companies mean more money through income tax for the government. All of this without having to waste extra resources on enforcing the crypto tax, and getting 100% of the income that was intended from the initial tax law.

However, some complications may happen with stocks and Forex investors, as they may become disgruntled for not being included in the exclusion. I could start talking how removing taxes on those capital gains is also beneficial, but that would turn into more of a rant, than an honest opinion.

So I’ll leave it here. The less tax there is for the individual, the more they have to spend with local companies, ultimately benefiting the economy while also benefiting themselves.