Taxing crypto would be the quickest way to regulate the industry

There is an old adage that we should tax the items we want the least. This is the basic argument for a tax on cryptocurrencies or, more specifically, on cryptocurrency exchanges.

The simple story is that we should recognize crypto as something without a useful social purpose. It’s like gambling, an activity that some people may enjoy, but which has no intrinsic social value. We don’t ban it, a lot of people like to do it and it’s a big industry in Las Vegas and elsewhere. But we tax it.

To some extent, this discourages people from playing, which is probably a good thing. There are many cases of compulsive gamblers, who bring financial ruin to themselves and their families with their big losses. If we can reduce such tragedies to some extent with a tax, that’s great.

We also generate revenue through gambling. State and local governments collection over $35 billion in gambling taxes in 2021.

Crypto should be seen as another form of gambling. A modest tax on crypto transactions, say 0.5%, should go a long way to both reducing trading volume and increasing revenue. This is a much lower rate than we charge most games of chance.

The volume of global transactions now exceeds some 10 trillion dollars a year. If we assume that about half of these trades are done in the United States or by American nationals, that would be $5 trillion a year. If we assume that volume drops by 50% in response to the tax, that gives us $2.5 trillion worth of transactions to tax. At a rate of 0.5%, this translates to $12.5 billion in annual revenue.

If we take that over a decade, assuming it grows at the same rate as the economy, we get $150 billion in tax revenue over a decade. It’s not huge compared to the entire federal budget, but it’s not entirely insignificant.

Debunking Big Claims

It used to be that we had people making big claims about how cryptocurrency would revolutionize finance and economics. The big story was that unregulated decentralized finance would be faster and cheaper than the traditional banking and financial system. People could use crypto to get credit and make payments much faster than if they had to go the traditional route.

The other big claim of the crypto was that it would be a hedge against inflation. If reckless governments and central banks pursue inflationary policies that undermine the value of currencies, people could turn to bitcoin and other cryptocurrencies as an inflation-proof store of value.

These stories have not gone well in recent years. Taking the latter first, we had a great opportunity to test crypto as an inflation hedge story over the past three years. The world has seen the biggest spike in inflation in four decades.

Rather than being a hedge against this inflation, the price of crypto has plunged, even when measured against devaluing currencies. If crypto worked as its proponents claimed, we should have seen cryptocurrencies rise by at least as much as the dollar and other currencies lost real value. The 10% inflation in the US should have meant that cryptocurrencies bought 10% more dollars. That’s not what happened.

Crypto has failed even more as a fast and cheap way to obtain funding and conduct transactions. It turns out that crypto transactions are generally neither fast nor cheap.

And unsurprisingly, the virtues of unregulated finance did not live up to the hype. They crashed into a cesspool of corruption. The world’s largest crypto exchange, FTX, was an embarrassing scam that apparently put Enron to shame.

Many of the leading crypto proponents are now calling for regulation so investors can rest assured that they are not having their money stolen. Even the Blockchain Association, the industry trade group, Call now for Congress to step in and regulate crypto.

Fighting illegality

Some will object to trying to impose a crypto tax arguing that the government cannot afford to administer a crypto tax that would apply to transactions by US citizens anywhere in the world. This is true, but it brings up one final reason why a crypto tax would be helpful.

The one area where cryptography has proven useful is in carrying out illegal transactions. People who sell drugs and weapons, or engage in extortion, have found it helpful to conduct their business in crypto to make it harder for law enforcement to track them. It’s a safe bet that these criminal operations won’t pay their tax on crypto trading.

It is often difficult to build a solid case against the main players in criminal networks. Potential witnesses may be intimidated into silence or killed. Evading a crypto trading tax can provide a useful alternative charge when building a compelling case for the underlying criminal activity is not possible.

There is precedent for going down this path. Notorious mob boss Al Capone did not go to jail for extortion, assault or murder. He was found guilty of tax evasion. Evading a crypto trading tax may be a charge that will allow us to lock up many of our modern Al Capones.

In short, a crypto trading tax is a way to collect revenue, reduce waste in the economy, and crack down on crime. Hard to do better than that.

This article does not necessarily reflect the views of Bloomberg Industry Group, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

dean baker is a senior economist and co-founder of the Center for Economic and Policy Research.

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