Many states are now actively considering what to do with cryptocurrencies (CCs) 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 for CC exchanges and transactions. Other states have similar regulatory bodies and most are working on devising appropriate regulations and it is likely that the “rules” will 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 the Central Bank, so it might be interesting to pull the strings for many 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 CCs should be treated as an investment or as a currency. Most governments have so far tended to treat CC as an investment, like any other commodity in which profits are taxed by the capital gains model. Some CC governments only view it as a currency that fluctuates in daily relative value and they will use tax 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 our investment gains could be tax-free if we bought them directly every now and then – say a new car. Maybe Germany will fine-tune their policy or reconsider how they go about it.
It is also more difficult for governments to enforce tax 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 almost impossible for any nation 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. There are very natural CCs born in the area of scarce regulation and control by governments, and that has both pros and cons. 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”.