The Government Dilemma: How To Tax Something One Pretends Does Not Exist

Cryptocurrencies are often criticized for failing to replicate some of the basic functions of fiat money. Governments are always ready to warn you that you can’t spend, or save, or trade, or make digital coins. This state of mind, however, is slowly but surely changing, as more benefits become apparent. Paying, saving, investing – bitcoin can serve all these purposes, and sometimes that happens with approval from authorities. 

Failing to Be Fiat, Proving to be Money

Policy makers and central bankers often claim that cryptos are unable to perform basic functions of fiat money – means of payment, medium of exchange, store of value, and unit of account. Many times, however, they acknowledge one or more of these characteristics, especially when that serves their priorities. Filling the coffers is one such priority, if not the main one, for just about any government. Taxes are the major source of budget revenues for most countries with open market economies. Last year’s record highs have put cryptocurrencies in the spotlight of this year’s tax campaign.

But how do they tax something they pretend does not exist, or exists without permission?

Authorities had very little time to solve the dilemma. Only several months separate the bull run that pushed bitcoin to almost $20,000 in December and Tax Day, which in many countries comes in April. That’s probably why we see some unexpected concessions in regards to cryptocurrencies.

“There is no plan to increase the use of private cryptocurrencies” – that’s what Latvia told Coppay, when the company inquired about crypto payments last year. “We consider them unable to fulfill money functions and a high risk means of payment,” the country’s central bank said in November. Latvijas Banka also “invited financial institutions and citizens to avoid engagement in crypto activities”. In April of this year, however, authorities in Riga decided that cryptocurrencies are “taxable”. They plan to collect 20% on gains from crypto deals now when the Finance Ministry recognizes them as a “medium of exchange”.

If Latvia is not big enough to be a major precedent, how about Germany? Authorities there decided not to tax bitcoin when exchanged with euros, but VAT is imposed on sales in bitcoin. Sounds like they are talking about a currency. Gains from long-term crypto holdings won’t be taxed. Isn’t that an acknowledgment that bitcoin can store value? By the way, crypto payments are doing well in the Federal Republik. Last summer the country’s largest online food delivery portal started accepting bitcoin (now both in BTC and BCH). In March, Germany’s Tourism Board announced it’s also taking cryptos for its services…

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