Many states are now actively considering what to do with cryptocurrencies (CC) because they do not want to miss out on tax revenues, and to some extent feel they need to regulate this market space to protect consumers. Knowing that there are frauds and cases of hacking and theft, it is commendable that consumer protection is being considered at these levels. The Securities Exchange Commission (SEC) was established in the United States for this purpose and the SEC has already introduced some regulations on CC stock exchanges and transactions. Other states have similar regulatory bodies and most are working to devise appropriate regulations, and the “rules” are likely to be dynamic for several years as governments discover what works well and what doesn’t. Some of the benefits of the CC are that they are NOT controlled by any government or Central Bank, so it might be interesting to pull the strings over the years to see how much regulation and control will be imposed by governments.
A major concern of most governments is the potential to increase revenue by taxing profits generated in the CC market. The central issue to be addressed is whether CC should be treated as an investment or as a currency. Most governments so far tend to treat CC as an investment, like any other commodity in which profits are taxed by the capital gains model. Some governments view CC only as a currency that fluctuates in daily relative value, and will use taxable rules similar to foreign exchange investments and transactions. Interestingly, Germany jumped the fence here by deciding that CCs used directly to purchase goods or services are not taxable. It seems a bit chaotic and unfeasible when all of our investment gains could be tax-free if we used them to buy something directly – say a new car – every now and then. Maybe Germany will fine-tune their policy or reconsider how they go about it.
It is also more difficult for governments to enforce taxable rules given that 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 impossible for any state to know about all the transactions of its citizens. Tax evasion is already happening, as there are several countries that provide global banking services that are often used as tax havens, protecting funds from taxation. By their nature CCs were born into an empire of scarce regulation and control by governments, and that has both good and bad sides. It will take time for governments to go through all of this by trial and error – it’s still all new and that’s why we call CC and Blockchain technology “game changers”.