As the crypto market continues to grow without a clear end in sight, more and more countries are starting to see the importance of having a comprehensive regulation in order to prevent any future issues.
When it comes to regulations whose sole reason is to protect the investors from any fraudulent activities, then we can say that most governments are on the road to success as the number of scammed individuals keeps on decreasing.
However, when it comes to discussing the crypto tax policies, nearly every government is experiencing issues of enforcing the law to its full extent. There are always some individuals that manage to slip through the cracks.
Although it is the case with regular taxes as well, cryptos simply have much more options for avoiding the watchful eye of the tax man.
Why are investors so negative about taxes?
Taxes are never good news, but for some reason, crypto taxes are often met with even more fervour than others.
The reason is that many countries don’t recognize cryptocurrencies as tradeable assets or even money for that matter. Therefore this leaves the investors dumbfounded as to why they have to pay tax on something that’s so ignored in the financial world.
When we think about these arguments, it’s hard to not see what the investors are getting at. Had the governments classified cryptos as something hazardous, like the alcohol and tobacco taxes in some countries, then there wouldn’t be so much confusion.
But at this point, the investors have a type of self-justification that. If they see a method of avoiding taxes on cryptos, they take it immediately without thinking of future consequences.
But it’s all human nature when we think about it. Being able to avoid something and having a very small chance of being discovered is very enticing.
Or the most common reason, which is simply a lack of guidelines. People just don’t know how to include cryptocurrencies in their tax reports and therefore sometimes don’t even bother to cash out.
How do crypto tax laws facilitate evasion?
It needs to be mentioned that the structure of the crypto tax laws themselves sometimes support tax evasion cases. But how? Aren’t the laws designed to prevent these cases?
Well, there are two types of crypto tax laws that one would encounter in the world and they’re both quite flawed when looking at it from an objective standpoint.
Let’s call these two options “Corporate Responsibility (CR)” and “Individual Responsibility (IR)”. These two options are what you’ll see in every country that has crypto tax laws. So, what are they?
Corporate Responsibility
The CR model is starting to become the most common. Basically what happens is that the government forces local cryptocurrency exchanges to record their customers’ trading volume and history, document it, and provide it to the tax agency.
The tax agency then calculates the due tax and files it to the individual so that they make the payment before the indicated deadline.
Individual Responsibility
The IR model is a bit more old fashioned, and more common with North American regions rather than European or Asian countries.
This one is quite simple. The individual traders themselves are responsible for calculating and filing the due tax on their crypto gains. Meaning that if you’ve made $5000 trading Bitcoin this month, 20% of that will be going to the government.
This one’s a bit more unreliable, so most countries are starting to move on to the CR model.
Although both of these models may look relatively Ok, they still fail to deliver the results governments are expecting from them.
How investors manage to avoid taxes
Both the CR and the IR models come with their advantages and disadvantages, but very serious flaws are preventing them from performing at 100% efficiency. Because of this, thousands of traders managed to find cracks in the law and are exploiting them as we speak.
The IR models are a bit easier for investors to avoid. Basically what they do is they diversify their crypto assets into different industries without technically cashing them out.
For example, traditional financial companies similar to IQ Option that are dealing with CFD and Forex trades are starting to accept deposits in cryptocurrencies. This entices the traders to “cash out” their cryptos using these platforms and diversify their assets even further.
Some Australian traders have begun “Cashing out” their cryptocurrencies on online gaming websites, from which they withdraw on their Skrill or PayPal accounts. After holding the cash on those electronic wallets for some time, they were to cash out bit by bit to avoid the tax man.
It’s a gruesome process, but when it comes to paying tens of thousands in tax, crypto investors are ready to take any means necessary.
The CR model is a bit more complicated, but it simply has one extra step than the IR model. All the traders need to do is to register with a foreign cryptocurrency exchange. The local exchanges won’t have information about the individual’s trading habits and therefore can’t deliver any info to the tax agency.
The foreign company is not required to give out the individual’s trading information as well, simply because it may not have a local license.
Once this step is taken care of the traders simply start the IR model process of “cashing out” through multiple third-party platforms.
Are these activities coming to an end?
Although traders were able to enjoy this process in the past, it may be coming to an end very soon after the FATF made some recommendations about regulating cryptocurrencies across the world.
Any payment above $1000 will have to be registered and confirmed with Identity checks, much like in South Korea where anonymous transactions are banned.
Should most countries accept these new rules, the crypto companies will have no other way but to comply, ultimately taking away the decentralization from the blockchain space completely.
But the fact is that that $1000 barrier can still be overcome by simply flying under the radar and withdrawing $900 at a time.
So what is the ultimate tactic that the government can use in order to prevent any further crypto tax evasion? Well, it’s quite simple but also extremely controversial.
Crypto tax laws should be repealed
The best crypto tax law is no crypto tax law to speak of and here’s why.
Regardless of how many resources the government may use to prevent crypto tax evasion, the predominant anonymous nature of the blockchain will still leave some cracks in the legislation.
Therefore, in the end, it’s the government itself that will suffer from the law and not the investor.
Repealing the crypto tax law is going to remove the expenses needed for its enforcement out of the equation, meaning that the government has no costs.
Allowing the traders to use 100% of their crypto profit is going to increase the overall purchasing power of the local consumer. This allows diversification in things like real estate and more consumer spending.
In the end, local companies will benefit from increased consumer spending and grow in size. The company growth can later be translated into increased corporate revenue tax.
By simply repealing the crypto tax laws in the country, governments will have the ability to not only grow the economy but still acquire a large chunk of taxes that were supposed to come from crypto capital gain.