How states are trying to make Bitcoin more “tangible”



Every state is dependent on them: taxes. But cryptocurrencies in particular offer the possibility – even if this is punishable – to evade the inspection and access of the tax authorities more easily than with many other assets. What this has to do with bogus arguments against Bitcoin and why tougher tax laws are not bad for the crypto industry per se.

Disclaimer: The topic of taxes and cryptocurrencies is looked at from a macroeconomic and political point of view. No tax tips or other recommendations are given. In addition, it should be noted that it is not only advisable from a moral point of view to be tax-honest, but that tax fraud is also a criminal offense.

A big advantage of crypto currencies is that their profits are basically tax-free after one year, at least in Germany. However, some also see the advantage in the fact that they generally ignore the subject of taxes and do not state profits that arise during the year in their tax returns. The risk of getting caught may be low for some crypto traders, as their transactions in the crypto space are generally not reported to the tax office.

Crypto Tax Evasion: Allegation or Inconvenient Truth?

Income from staking, lending or just “back and forth trading” can theoretically be earned quickly bypassing the tax authorities. How big the sums really are or the lost taxes is difficult to really quantify. At present one might assume that the damage to the states is still limited. But with the current market growth and the increasing flight of capital to Bitcoin and Co., this assessment is unlikely to last forever.

After all, the need to exchange cryptocurrencies for fiat decreases with every day and thus also leaves traces in the reportable banking system. Stablecoins ensure stability, Bitcoin serves as a store of value with price potential, large corporations can be traded as tokenized stocks and interest income is generated with staking and lending. The diversified portfolio is increasingly becoming a reality in the token sector. At the same time, states feel more and more cornered. Accordingly, it is becoming more and more difficult to allow passivity on the subject of taxes.

Fake arguments against Bitcoin

The concerns that have been heard about Bitcoin lately, especially from politics and public opinion leaders, seem like pretended arguments. Bitcoin is not used on a large scale for illegal transactions, nor should the state really care so much about power consumption in mining. Consumer protection warnings that investors should beware of the high volatility also seem implausible in parts. At least it suggests that the state has one main concern: lost tax revenue.

When the state loses tax revenue, it is a serious problem. It is not for nothing that the penalties for capital crimes are often – at least subjectively perceived – comparatively high compared to violent crimes in which the individual and not the state or the state treasury are harmed. The subject of taxes in crypto currencies is often kept silent. Nobody wants to wake sleeping dogs – neither the state nor the tax evader. When Finance Minister Olaf Scholz expresses privacy concerns about crypto currencies and wants to reserve the right to ban stablecoins in order to protect consumers, then in the end he only wants one thing: to prevent people from evading tax access by the state. It is not for nothing that the Federal Ministry of Finance recently presented a draft law with the “Crypto Value Transfer Ordinance”, which is intended to enable the state to inspect crypto transactions.

There is no campaign against cryptocurrencies

The subject of taxes on crypto currencies is also on the agenda of the Biden government and recently even contributed to the corrective mood on the crypto market. The state would like to expand the reporting obligations for brokers and wallet providers for digital currencies. Across jurisdictions, all information necessary for taxation should be made available to the American authorities. In addition, all crypto transactions above $ 10,000 are to be reported to the federal tax authorities. Finally, the US Treasury Department complains that crypto investors are increasingly hiding crypto transactions from the tax authorities via offshore accounts.

It is more than understandable that such reporting obligations arise. Regardless of whether in the USA or in Europe, it is generally customary to submit reports to the tax office if the amount is different. For example, if you pay a slightly larger amount into your bank account, you have to assume that the tax office will receive a message and ask where the money comes from. What is happening around the world right now is nothing more than transferring existing tax and reporting standards to the crypto sector. To speak of a “campaign” against crypto would be a bit of an exaggeration in this context. It only becomes problematic when the tax burdens for crypto currencies significantly exceed the burdens on other assets and this forces the state to put crypto assets at a relative disadvantage.

Corona debt and taxes

The subject of taxes and the question of how the state can get more of it without stalling the economy is more topical than ever due to the corona budget deficits. Even before Corona, most states were highly indebted and are now in an even more tense situation. Especially since it is currently not possible to fully capture the total costs of the corona pandemic.

Discussions about a stronger taxation of assets or a property levy are therefore picking up speed. Since cryptocurrencies are currently so difficult to record, there is no great concern that there will be more radical cuts, in contrast to, for example, well-recorded real estate. The risk of evading excessive special taxes on crypto currencies is currently still too high for the state. Only when the state has secured more direct access would larger special taxes on crypto values ​​be more likely.

Contrary to the trend: China will legalize Bitcoin

In addition to Europe and the USA, the question always arises of how China positions itself on this issue. One might think that China is now even further from legalization than it was a few months ago, after its tougher course against Bitcoin mining systems and its fundamental crypto trading ban.

Another interpretation, on the other hand, is that China is only taking this tough approach to legalize cryptocurrencies. If China gains control of the market and, for example, only allows crypto trading or custody via regulated third-party custodians who hold the private keys, then China will open up a new way of levying taxes on crypto profits. After all, it is an open secret that many Chinese own cryptocurrencies and are still trading. However, since this is not legal, China cannot levy taxes on the “Chinese digital national wealth”. Only with a legalization of crypto currencies could the Chinese state secure tax income through crypto trading and get an overview of the financial situation. Under this premise, the thesis can be argued that tougher reporting and tax measures increase the likelihood of legalization of cryptocurrencies or make a ban less likely.

Final boss decentralized finance

The safekeeping and holding of cryptocurrencies on central crypto platforms is, measured against what is currently being developed in the DeFi area, a state request. While platforms like Binance, Kraken, Bittrex etc. can be obliged to meet state requirements, this cannot be done with decentralized protocols. Neither reports to the tax office, nor the recording of identity, is to be enforced by the state with the decentralized protocols. For this reason alone, it cannot be assumed that the crypto platform operators, which are easy to regulate, will be used too hard. The fear of evasive movements in really decentralized crypto realms is likely to be too great. Rather, the USA, Europe and China now seem to be trying to get the existing crypto sector under control quite quickly in order to guarantee transaction and tax access.




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