Photo by Art Rachen on Unsplash
The recent volatility in the banking industry (think SVB) reiterate the increasing scrutiny on whether the traditional centralised monetary system is really as stable as masses thought it is. Evidently, we can see investors rushing into the crypto market after the recent shake in confidence from the SVB saga. Government should be wary of how their tax returns can be affected.
Firstly, crypto assets and crypto transactions can act as ‘functional substitutes’ for traditional assets and transactions. As existing tax laws are drafted without crypto assets in mind, this can produce a host of unintended tax consequences and produce opportunities for tax arbitrage.
Secondly, the values of crypto assets exhibit significant volatility, with extreme swings in the values of tokens on average. There are also issues of potential instability in crypto markets, as evidenced by the recent ‘crypto winter’. In the absence of appropriate safeguards and ring-fencing, these crypto losses could potentially be used to set off income from other sources, resulting in a significant erosion of the tax base.
Thirdly, crypto assets give rise to certain events which may not have a traditional equivalent, such as mining and forging. Tax systems which do not consider these new potential sources of revenue risk losing out.
Fourthly, crypto assets may be used to facilitate tax evasion. The pseudonymity offered by crypto assets and the opportunities to conduct transactions outside of the traditional banking system inherently poses the risk of tax evasion, both premeditated and incidental (for example, through the shadow economy).
I believe this is among the evolving space where governments will eventually get a grip on sooner or later. So crypto enthusiasts, ride on these benefits before any regulations!