I understand the importance of tax, even though I don't entirely get the point of it when the government will just print money anyway, but I accept that we all could keep some part of our earnings to improve our society. However, I feel like sometimes, it seems like the approach used to tax cryptocurrency earnings seems a bit more like a witchhunt than a fiscal policy.
In my spare time, while I was out with my mate and watching the finals of the Euros, I came across an article that talked about how crypto is taxed in some parts of the USA. In the editorial, the article discussed how a certain gentleman took his city to court because he wasn't satisfied with the way crypto was being taxed.
In my country, cryptocurrency isn't even recognized or protected under any law, so the government doesn't see my activities as taxable events. However, anything you buy with your crypto that's converted to fiat is liable to be taxed.
In America where crypto is perceived as an asset, profit and losses are viewed as taxable events under capital gains tax. However, liquidity pools and staking earning are considered under income tax.
An expensive misunderstanding
As far as the government is concerned, profit is profit, and this is regardless of the asset you earn it in. However, in most places, people still have to pay taxes in fiat.
Other than the fact that crypto tax is paid in fiat, the main problem I have and one that was the bone of contention in the court case is the government's perception of staking.
According to the court case, minting new coins or tokens through staking is considered earnings. If we look at it on the surface, are you really earning anything when you print new Hive, Leo, Cub, or any other "staking reward"?
The government's perception of cryptocurrencies is that when we print new crypto, we've earned money but technically speaking, that's not true. In fact, digital assets are pretty much worthless unless we take them to the market to sell them.
So, if you don't take your asset to the market, should it be considered a taxable activity? If we're to put it on a scale, like the analogy in the publication, do you get taxed for simply painting or picture or do you get taxed when you sell the picture?
In the plaintiff's view, the approach to taxing crypto is invasive and looks a tad bit malicious, if you ask me. The "earnings' from staking aren't actually earnings, they're just new entities that haven't been taken to the market.
If you don't sell it, you ideally shouldn't be taxed for creating it. This is regardless of the fact that there's a market value for the created token.
I mean, there's a market value for pretty much everything but that doesn't mean you get taxed for everything you create right? If you don't try to make money from it(sell it), then you really shouldn't be taxed for it.
It is also worth noting that taxing staking rewards will in turn create complications for people trying to evaluate your tax.
So let's assume you mint new Cub and the market price of the token at the time is $20, and you're mandated to pay 10% of your earnings as tax, how do you record this event, especially when you consider that you didn't actually convert the CUB to USDT.
Also, let's assume you pay the 10% when Cub is $20 and then whales decide to dump the value to $12, how do you balance all these movements out?
Instead of this complicated scenario, it would be wiser for the government to only tax earnings from sales or trade, rather than put pressure on hodlers. Sometimes, I feel like all these complications are put in place to make outlaws out of the good people of crypto town.
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