Bitcoin essentially had its coming out party in 2017. Once an obscure digital currency known only to techies, cryptocurrencies like Bitcoin are becoming increasingly mainstream. But it’s not just people clamoring to get in on the cryptocurrency action that are taking note – governments around the world are also paying more and more attention to cryptocurrencies.
Specifically, the UK and the US have plans to crack down on Bitcoin amid tax evasion fears. Why the crackdown, and what does it mean? Luckily, we’re here to break it down for you.
Why Are Governments Concerned?
The essential technology underlying Bitcoin and other cryptocurrencies – known as blockchain – is predicated on anonymity. Transactions aren’t linked to a specific person but rather to just an electronic address. This secrecy is undoubtedly what makes part of Bitcoin so attractive.
The problem is that governments across the world, including the US and UK governments, are becoming increasingly worried that Bitcoin could become a mainstay of the underground economy given how easy it is for people to conduct transactions anonymously using it. Currently, the underground economy is driven largely by cash. It currently comprises only around 8.4 percent of all economic output in the US, which is small compared to many other countries (particularly developing countries), but this still costs the IRS somewhere in the ballpark of $500 billion annually.
The big concern is that if cryptocurrencies like Bitcoin replace cash as the preferred means of anonymous transactions, then the underground economy could expand dramatically, subsequently driving up the amount of lost tax revenue. Steven Mnuchin, the Treasury secretary, recently told the press that he was concerned that Bitcoin could be the 21st-century version of a Swiss Bank account, allowing people to easily make hard-to-trace anonymous transactions and making it easier to dodge taxes. This could result in public coffers taking serious hits as people avoid their tax responsibilities, so the issue is a very serious one for many governments.
What Are They Doing About It?
Increasingly, governments are making moves to tax cryptocurrencies. In the United States, for example, the IRS will tax all transactions related to the mining, spending, trading, exchanging, and airdropping of cryptocurrencies beginning this year. Investors should also note that because the IRS is treating cryptocurrencies like property, there will be capital gains tax implications.
In the United Kingdom as well, the government is tightening up on cryptocurrencies. Prime Minister Theresa May has repeatedly stated her intent to take action on Bitcoin, expressing concern that it may be used by criminals and those who wish to avoid paying tax. It’s still unclear what action exactly the UK will take on the matter, but there have been rumors that the government may try to prevent people from making transactions anonymously.
The bottom line is that as countries across the world become increasingly attuned to the potential of cryptocurrencies to be abused for tax purposes, tighter regulations will likely be put in place. In addition to the US and UK, a number of other countries are cracking down on cryptocurrencies, including South Korea and France, and more are likely to join the growing list.