The government will have to ease up crypto restrictions and make significant investment into the ecosystem to effectively tax it. The alternatives — traditionally, would be an economic suicide.
But either way, they will be greatly limited in how much they can tax the ecosystem and at the same time risk a great damage to its fiat economy.
Since the strategic led down of a crypto reserve in the United States(which was predictable), it's been clear how the government will want to play this. What the United States government has just done is offer a template that every other government can adopt.
This template happens to be to not buy crypto at all but seemingly sell the idea that you're friendly with the technology and will see to enabling it to grow. The biggest takeaway from the strategic Bitcoin reserve is that the government is pro USD and will always be pro USD, it would be stupid to think they'd be otherwise.
Simply dumping USD into Bitcoin would be a literal signal of a loss of confidence in the United States dollar. What would that look like for foreign countries holding trillions in US debt and its position as a reserve currency and default unit of account?
It would be disastrous for the economy because the bond market would crash, skyrocketing yields, potentially leading to the US defaulting on its debts. As much as I hate to admit it, this was the best decision the administration could have made.
However, it's only a case of slowing the inevitable which is only a positive for the people, and not the government.
The rest of the world ought to be thankful to Trump for not doing what Bitcoin maxis wanted because whilst it would have been a big win for the industry, it would have sent shock waves through global financial systems, hurting multiple economies of which majority of the contributors(citizens) are not holders or users of cryptocurrencies, yet.
Crypto is a global movement: localization is foul play
Before we can talk about taxation and why it will fail, we have to understand what crypto is exactly.
Cryptocurrency is a type of digital or virtual money that uses cryptography (advanced math and computer science techniques) to secure transactions. Unlike traditional money issued by governments (like dollars or rupees), cryptocurrencies are decentralized and typically operate on technology called blockchain, which is a public, tamper-proof digital ledger. — GPT
Sometimes I believe people lose sight of what the technology behind crypto is and what mission it's on.
There are very specific details in this definition that should never be forgotten.
The most obvious message which gets lost when people get greedy for government endorsement is the literal fact that crypto is a technology built to be decentralized and void of government control.
If a cryptocurrency is not issued by a government, and is specifically built to bypass intermediaries and centralized control, tell me something, why should a backing community accept the deliberate localization of their economy by a government?
I think every crypto blockchain that has been called a “Made In America” is stupid for not kicking back against that localization. But greed makes them not realize that this is foul play disguised as a merit.
The government, which is a legal body, formally defines you as a business made in its Country, what do you think that entails?
This is so basic that it's supposed to be easily sniffed out. By acknowledging and effectively embracing this localization, these blockchain platforms essentially subject themselves to stringent regulations by the United States government. So you want to enjoy tax benefits as made in America? There's a cost, even if not immediately obvious. The long term holds various flaws that could hurt the economy of these meant to be decentralized platforms.
Crypto's lack of localized identity will make it difficult to tax
If something has no founder, no head quarter and none of that traditionally common support systems a business would have, how then would a government approach regulating it?
What laws does the system honor? What would be the deciding factor?
Recall that at the beginning I mentioned that the government will have to ease up crypto restrictions and make significant investment into the ecosystem to effectively tax it.
The tax scene right now is a giant exploitation machine. The introduction of cryptocurrencies and the adoption poses a serious threat to this system that has been milking the citizens of countries across the world.
To effectively tax crypto, the government will have to become involved with onchain governance which entails buying into positions that grows the value of these crypto economies, essentially.
Only through being an active body of crypto communities through stake, can the government implement taxes on the blockchain level to feed into the traditional finance system.
As previously stated in the case of the United States, a move like this could be interpreted in ways that hurts fiat markets. Also, there will definitely be a lot of push backs to such moves by the government, increasing the risk of loss of investments as networks split in the event of a lack of consensus.
These realities would effectively keep the government away whilst crypto continues growing into a stage where it becomes completely detached from the flaws of the traditional finance system.
There aren't many other options to tax crypto out there that isn't suicide for any fiat economy. We can look at what happened in India when a 1% tax deduction at source(TDS) was introduced in 2022. This was in addition to there already being a 30% capital gains tax in place.
Capital gains taxes on Crypto doesn't seem to work, evident in how the governments, globally, are seeking alternatives.
What was the reaction to this? Well, reportedly, native exchange volumes fell by as much as 70% and this is exactly reflective of what would happen globally if the government attempts strict tax policies.
Nigeria is the latest country attempting to impose taxes on crypto transactions, just as India and the same reaction is expected.
Being a technology with no localized identity means that businesses will simply just keep moving away from countries and governments that limits or tries to exploit them. And people will bypass laws and evade things like taxes by moving away from platforms that attempt to enforce strict government policies.
There's also the concern that Value-added taxes(VAT) could become a tool to tax crypto globally given that that's the only tax system that can be applied to everyone because they are directly applied on goods and services. Well, while this could sound smart on paper, the worst thing any government can do is go full nuts on taxes through VAT.
VAT are meant to be low, in any event that they become high, businesses would close down and exit countries, consumer spending would decrease, black markets and illegal trade operations would expand, the economy would slow and the traditional finance system would suffer a great financial crisis including inflation.
Every government out there will attempt and act confident in being able to tax crypto but every process involved will either yield little results or be completely an economic threat if pushed through.
Crypto(those that reject localization and stay decentralized) is weirdly the technology that will unify global trade but at the same time not conform to any centralized body for regulation.