5 Reasons Why Bitcoin Should NOT Be Taxed

Why BTC should not be taxed

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Taxing Bitcoin and other cryptocurrencies is a hot topic, but let’s face it, trying to tax something that was born to be rebellious is like trying to put a square peg in a round hole.

Primarily, Bitcoin, by its very nature as a decentralized digital currency, falls outside the traditional financial systems. 

It was designed to provide financial autonomy and privacy, free from governmental control.

For this reason alone, I simply cannot see how governments can argue that they have any right to the fruits of the Bitcoin tree…

Imposing tax on Bitcoin transactions seems to contradict this fundamental principle, potentially stunting the growth and development of this innovative technology.

Show Me the Crypto: The Tax Dance with Bitcoin’s Digital Dollars

The current position for most holders in the majority of countries, like the US and the UK, that have published some other type of guidance in terms of taxing Bitcoin has been that you are likely subject to either income tax or capital gains tax.

The majority of jurisdictions tend to follow or adopt policies set by the US government as a result of their spearheading of FATF (Financial Action Task Force). As a consequence, most countries or jurisdictions appear to treat Bitcoin as a form of “digital property.” 

Most traders and hodlers turn to crypto tax software to take care of the burden of calculating these crypto taxes.

There are 2 main types of crypto taxes that draw specific attention from proponents for and against crypto taxes.

Capital gains tax

The general principles are that when you buy crypto and, let’s say, the market value is $1, you then later sell it for $2, you have made a $1 capital gain, and you are now liable to pay anything between 5% and 50% tax on that capital gain.

Of course, this is all dependent on your individual circumstances, jurisdiction, nature of the transaction, allowances, how long you held the crypto, etc. 

The principle of having to pay anything on that capital gain is what I take issue with.

Income tax

If you earn a reward for providing a goods or service then that is seen as taxable income (this counts for airdrops and forks too). If you live in a jurisdiction where tax is levied on income then you are liable to pay income tax on bitcoin that you receive for providing goods or services.

Just because you receive bitcoins as payment, and you can easily receive them pseudo anonymously doesn’t mean you are absolved of paying tax on that income. 

This I do not have that big an issue with except that I believe for this approach to work, you should only have to pay tax on the FIAT value of the transaction, and in some instances, I think the tax should only be due on exchange of the asset for FIAT money

1. No country or government owns, regulates or even contributes to the Bitcoin ecosystem.

Bitcoin operates independently without centralized control from any specific country or entity. 

It cannot be argued that the intellectual property rights exclusively belong to any individual or group, regardless of contested claims (such as CW’s self-identification as Satoshi). 

Regulation

Regulation is a complete farce. There are tons of bitcoin scams, and regulators barely scratch the surface with enforcement… in many cases they don’t even bother looking into it. 

Nevertheless, even with perfect regulation, the authorities are not adding value to Bitcoin, they are adding value by regulating the process of exchanging Bitcoin for FIAT currencies. 

Therefore, they have no justified claim to benefit from the increase in value of Bitcoin in FIAT terms.

I do, however recognise that there is a distinct difference between Bitcoin and other cryptocurrencies in relation to taxation.

Bitcoin Tax

Seeing as Bitcoin is like the Sun, where no entity has a claim to its production of energy, there should be no claim to any proceeds as a result of appreciation of Bitcoin in FIAT terms.

There simply is no basis for any country to claim any sort of right to Bitcoin profits or appreciation as it completely lives in cyberspace.

Crypto taxes on “shitcoins”

Alternative coins (shitcoins) such Ethereum (ETH) or Ripple (XRP) or any similar coins may have companies behind them which are registered entities and, therefore, should be seen as securities

As such, it makes sense for governments to assert control and, therefore, regulation of said assets.

2. Bitcoin is not recognised as a currency, but as a digital asset. 

You might be wondering why this digital maverick doesn’t get to rub shoulders with the Dollars and Euros of the world. 

Well, it’s kind of like being the cool outsider at a high school party – it’s just too avant-garde for the traditional finance crowd.

You see, Bitcoin, with its decentralized nature and lack of a physical form, doesn’t quite fit into the old-school currency clique. It’s more of a digital asset – think of it as the rebellious love child of currency and stock. 

But what is the difference?

Unlike currencies, it’s not controlled by any government or central authority. And unlike stocks, it doesn’t represent ownership in a company. 

Instead, Bitcoin is a whole new beast, a kind of value storage that allows people to transfer wealth digitally. 

It’s like the bad boy of finance – doesn’t play by the rules but still gets all the attention. So, is it a currency? Not quite. But a digital asset? Well, I would not go that far either. 

My opinion is that Bitcoin is “internet currency”. I believe governments should treat Bitcoin more like a foreign currency, only regulating the interaction of Bitcoin with FIAT currency and only taking a cut of the fees generated by such interactions. 

3. Practicality and administrative complexity. 

There are practical reasons why it is a bad idea to tax crypto transactions. Many of these transactions are hard to distinguish. 

For example, how would anyone know the difference between a transaction where crypto was sent from one wallet to another in return for goods or services and one where one crypto is exchanged for another? 

How will a decentralized exchange be regulated? 

Placing responsibilities on individuals to keep track of all these transactions on top of airdrops, hard forks and more is simply too much.

Imagine trying to keep track of all your cash transactions in a multi-currency environment. Most people would simply give up and that would be bad for adoption and development.

Fair Market Value

One of the biggest issues that face regulators, authorities and users alike, is the fact that bitcoin is not regulated and is priced differently in different currencies and jurisdictions. 

For example, Bitcoin, at one point in 2017, was selling for a 70% premium in Nigerian Naira. In South Africa, as a result of exchange controls, bitcoin currently sells at a 3-7% premium.

Who gets to decide which value from which exchange is the “current market rate”?

4. Double taxation. 

Taxing Bitcoin transactions as both a commodity and a currency can potentially result in double taxation.

In certain jurisdictions, Bitcoin is considered property by tax authorities, which means individuals may face taxation when they acquire it and again when they use it for transactions.

This situation seems illogical, and I strongly believe that enforcing such a draconian crypto tax regime would be impractical. 

While the onus would seemingly fall on individuals to be honest, this approach introduces a multitude of new issues, including retrospective liability for honest mistakes and a heightened risk of tax evasion. 

The latter arises from the inherent difficulty of ensuring everyone pays their fair share of taxes.

It is crucial to strike a balance that does not deter legitimate usage of cryptocurrencies while still ensuring compliance with tax regulations.

5. Promoting global consistency and fostering economic activity are key factors in driving progress and prosperity worldwide.

Tax regulations for cryptocurrencies differ across jurisdictions. Treating crypto transactions as currency exchanges can foster global consistency in their regulation and taxation. 

This would alleviate confusion for individuals and businesses operating across borders.

…encouraging economic activity

Alright, picture this: Governments decide to take a chill pill and skip slapping capital gains tax on crypto transactions. 

And guess what happens? 

It’s like they roll out the red carpet for economic fireworks in the cryptocurrency universe.

We’re talking turbo-charged growth of blockchain wizardry, a universe of wild new ways to use cryptocurrencies, and just maybe, a big, juicy slice of economic pie for everyone at the table.

What will the eventual outcome be?

I don’t see how any government will give up trying to get a piece of the pie, and in some cases, I can see how tax authorities will come down very hard on people using Bitcoin or other cryptocurrencies to try and evade taxes. 

Ultimately, I predict that serious Bitcoin hodlers will take the same approach as most high-net-worth individuals. Simply find a way, through clever tax planning, to pay the minimum tax on capital gains they can get away with. 

For the rest of us, it’s likely “death and taxes,” as they say…

This article is NOT meant to be financial advice or encouragement to evade taxes. It is simply my opinion of why tax should not be levied on Bitcoin transactions and / or capital gains. For tax advice on your crypto holdings please reach out to a registered financial advisor or tax consultant.

What do you think about paying capital gains tax on Bitcoin? Let me know in the comments below!


About the author

Gareth Grobler is a crypto enthusiast, a kiteboarding aficionado, and a staunch advocate for a healthy lifestyle. With an analytical mind fascinated by the intricate workings of cryptocurrencies, Gareth spends their time navigating the exciting fluctuations of the digital financial landscape.

When not immersed in the world of blockchain technology, you’ll find me harnessing the wind’s energy on a kiteboard. Gareth’s writing style is a reflection of my diverse interests – a mix of insightful analysis, thrilling adventure, and a touch of humour. Whether dissecting the latest crypto trends or sharing kiteboarding escapades, my perspective is bound to inform, entertain, and inspire.

Disclaimer: This article should not be taken as, and is not intended to provide any investment advice. It is for educational and entertainment purposes only. As of the time posting, the writers may or may not have holdings in some of the coins or tokens they cover. Please conduct your own thorough research before investing in any cryptocurrency, as all investments contain risk. All opinions expressed in these articles are my own and are in no way a reflection of the opinions of The Bitcoin Manual

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