Many countries are now actively thinking about what to do with cryptocurrencies (CC) because they do not want to exhaust tax revenues and to some extent believe that they need to regulate this market space to protect consumers. Knowing that there are cases of fraud, hacking and theft, it is commendable that consumer protection is considered at these levels. The Securities and Exchange Commission (SEC) was established in the United States for this very purpose, and the SEC has already established a number of rules for CC exchanges and transactions. Other countries have similar regulators and most are working to develop appropriate rules, and it is likely that the “rules” will remain dynamic for several years because governments figure out what works well and what doesn’t work. Some of the benefits of CC are that they are NOT controlled by the government or the central bank, so for years it may be interesting to see how much regulation and control will be imposed by governments.
The main concern of most governments is the possibility of increasing revenues by taxing profits earned in the CC market. The main question to be answered is whether CC should be treated as an investment or as a currency. Until now, most governments have treated CC as an investment, as well as any other product whose profits are taxed using the capital gains model. Some governments view CC only as a currency whose relative value varies daily, and they will use tax rules similar to foreign exchange investments and transactions. Interestingly, Germany crosses the threshold here and has decided that CC, used directly to buy goods or services, is not taxed. It seems a bit chaotic and impractical if all of our investment returns can’t be taxed if we use it from time to time to buy something, say, a new car. Perhaps Germany will clarify or revise its policy along the way.
Governments also find it more difficult to enforce tax rules because there are no consistent global laws requiring CC Exchanges to report CC transactions to the government. The global and distributed nature of the CC market makes it almost impossible for a country to know about all transactions of its citizens. Tax evasion is already occurring as several countries offer global banking services, often used as tax havens to protect funds from taxes. By its very nature, CCs have been established in a restricted area of government regulation and control that has both advantages and disadvantages. Governments will need time to process all this by trial and error – all this is still a novelty, so we call CC and blockchain technologies “cardinal changes.”