Cryptocurrencies Should Be Taxed

Part 1 of “Unpopular Opinion” series

Do you agree or disagree with my unpopular opinion? Let me know in the comments.

Everyone dreams of making money without paying taxes.

I too am one of these people.

That’s why I strongly believe that countries should follow the lead of Switzerland, Singapore and Portugal by completely exonerating capital gains taxes for occasional traders and long-term holders who invest their personal savings. The money invested by ordinary people has already been subject to income tax and their decision to sacrifice short-term gratification of spending for potential long-term gains should not be punished with additional taxes. Indeed, investing always includes the risk of potentially losing it all.

Tax policy should encourage investment.

Occasional traders and long-term holders should be rewarded with tax-free capital gains

However, I also believe that taxes should be levied on certain activities.

For example, institutional investors and professional traders should pay taxes on their capital gains. Why? Because they actively move millions of dollars every day in and out of the market and taxes are simply an instrument that bring balance to the speculative frenzy.

Either you abolish all business taxes, or you tax all businesses

By taxing every transaction, you can ensure that speculation doesn’t spiral out of control: In 1936, John Maynard Keynes wrote that “Speculators may do no harm as bubbles on a steady stream of enterprise. But the situation is serious when enterprise becomes the bubble on a whirlpool of speculation”. To prevent the speculators from dominating the market Keynes state that “The introduction of a substantial Government transfer tax on all transactions might prove the most serviceable reform available, with a view to mitigating the predominance of speculation over enterprise”.

As transfer taxes would be difficult to implement and collect in a systematic fashion on decentralized exchanges, capital gains taxes appear the more sensible solution.

Economist J.M. Keynes warned about the dangers of excessive speculation

Also, from an ethical standpoint, professional crypto investors should be taxed like any other business. Why shouldn’t they pay any business taxes when Joe-Schmo LLC pays his fair share? Either you abolish all business taxes, or you tax all businesses.

Tax burden is real and speculative business should not have preferential treatment

Further, taxing business profits made from crypto trading at a reasonably high rate is also a means of discouraging excessive wealth being poured into crypto markets to avoid investing in the real economy.

Trading and investing are separate activities with different real-world consequences: Investing in a project’s ICO to help them develop a product with real-world use cases is not the same as intra-day speculation for private profit. The first needs encouraging while the second needs to be kept in check. One danger of unfettered trading is the ever-increasing temptation of creating sophisticated financial instruments akin to those that led to the 2007 financial crisis. I’m not saying crypto financial instruments will lead to such a crisis, but I do believe there is considerable risk involved when excessive trading is encouraged. Human nature is programmed for greed and dishonesty.

Tax policy should keep it in check.

Crypto was invented to prevent the risks created by runaway fiat finance

As for mining, the issue is a little more complex.

Most countries consider miners to be self-employed and levy income taxes on their gains. However, Western miners are facing stiff competition notably from Chinese mining farms that have the advantage of much lower costs (labor and resources). In the long term, this uneven playing field may hurt decentralization.

The income tax rate on mining should include deductibles for costs incurred by the miners, such as rebates for electricity consumption or subsidies to foster investment in more efficient power supplies.

The world’s biggest Bitcoin mines are located in China – where mining is just a fraction of the cost as in the USA of Europe

Ultimately, the taxation of cryptocurrencies will become the norm. 

The question is how will they be taxed?

The key is finding the right balance between maximizing government revenue and encouraging innovation and investment.

Given the shaky finances of many Western countries, governments will be tempted to favor the first imperative rather than the second.

Is the crypto lobby powerful enough to prevent them?

Many governments are heavily indebted and will be tempted to maximize tax revenue via punitive tax rates

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