Many nations are now actively considering what to do about crypto currencies (CC’s), as they do not want to miss out on tax revenue, and to some degree they think they need to regulate this market space for the sake of consumer protection. Knowing that there are scams and incidences of hacking and thievery, it is commendable that consumer protection is being thought of at these levels. The Securities Exchange Commission (SEC) came into being in the USA for just such a purpose and the SEC has already put some regulations in place for CC Exchanges and transactions. Other nations have similar regulatory bodies and most of them are working away at devising appropriate regulations, and it is likely that the “rules” will be dynamic for a few years, as governments discover what works well and what does not. Some of the benefits of CC’s are that they are NOT controlled by any government or Central Bank, so it could be an interesting tug-of-war for many years to see how much regulation and control will be imposed by governments.
The bigger concern for most governments is the potential for increasing revenue by taxing the profits being generated in the CC market space. The central question being addressed is whether to treat CC’s as an investment or as a currency. Most governments so far lean towards treating CC’s as an investment, like every other commodity where profits are taxed using a Capital Gains model. Some governments view CC’s only as a currency that fluctuates in daily relative value, and they will use taxation rules similar to foreign exchange investments and transactions. It is interesting that Germany has straddled the fence here, deciding that CC’s used directly for purchasing goods or services are not taxable. It seems a bit chaotic and unworkable if all our investment profits could be non-taxable if we used them to directly buy something – say a new car – every so often. Perhaps Germany will fine tune their policy or re-think it as they go along.
It is also more difficult for governments to enforce taxation rules given that there are no consistent global laws requiring CC Exchanges to report CC transactions to government. The global and distributed nature of the CC marketplace makes it almost impossible for any one nation to know about all the transactions of their citizens. Tax evasion already happens, as there are several countries that provide global banking services that are often used as tax havens, sheltering funds from taxation. By there very nature CC’s were born into a realm of scant regulation and control by governments, and that has both upsides and downsides. It will take time for governments to work through all this by trial and error – it is still all new and it is why we tout CC’s and Blockchain technology as “game changers”.