There is an old saying that we should tax the items we want less of. That’s the basic argument for a tax on cryptocurrency or, more specifically, trades of cryptocurrencies.
The simple story is that we should recognize crypto as something with no useful social purpose. It’s like gambling—an activity some people may enjoy, but of no intrinsic social value. We don’t prohibit it, many people enjoy doing it, and it’s a major industry in Las Vegas and elsewhere. But we tax it.
To some extent, this discourages people from gambling, which is probably a good thing. There are many cases of problem gamblers, who bring financial ruin on 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 raise revenue from gambling. State and local governments collected over $35 billion in taxes from gambling in 2021.
Crypto should be viewed as just another form of gambling. A modest tax on crypto trades, say 0.5%, should go a long way towards both reducing trading volume and raising revenue. This is a much lower rate than we impose on most gambling.
Worldwide trading volume is now somewhat over $10 trillion annually. If we assume that roughly half of these trades are either done in the US or by US nationals, that would amount to $5 trillion a year. If we assume that volume falls by 50% in response to the tax, that gets us $2.5 trillion in trades to tax. At a 0.5% rate, that translates into $12.5 billion in annual revenue.
If we take that over a decade, assuming growth in step with the economy, we’re looking at $150 billion in revenue from the tax over a decade. That isn’t huge in terms of the whole federal budget, but it’s not altogether trivial.
Debunking Grand Claims
In earlier days, we had people making grand claims for how cryptocurrency would revolutionize finance and the economy. The big story was that unregulated decentralized finance would be quicker and cheaper than the traditional banking and financial system. People could use crypto to get credit and make payments far quicker than if they had to go the traditional route.
The other big claim for 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 haven’t panned out well in the last few years. Taking the second one first, we had a great opportunity to test the crypto as an inflation hedge story over the last three years. The world saw the largest burst of inflation in four decades.
Rather than being protection against this inflation, the price of crypto plunged, even when measured against the devaluing currencies. If crypto functioned the way its proponents advertised, we should have seen cryptocurrencies rise by at least as much as the dollar and other currencies lost real value. Inflation of 10% in the US should have meant cryptocurrencies bought 10% more dollars. That’s not what happened.
Crypto failed even more badly as a quick and cheap way to get finance and make transactions. It turns out that transactions in crypto are generally neither quick nor cheap.
And unsurprisingly, the virtues of unregulated finance weren’t up to the hype. They crashed in 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 proponents of crypto are now begging for regulation so that investors can be assured that they aren’t having their money stolen. Even the Blockchain Association, the industry trade group, is now calling for Congress to step in and regulate crypto.
Some will object to trying to impose a crypto tax by arguing that the government doesn’t have the means to administer a tax on crypto that would apply to trades by US citizens anywhere in the world. This is true, but it brings up a last reason why a tax on crypto would be useful.
The one area where crypto has proved useful is in carrying on illegal transactions. People dealing drugs and arms, or engaging in extortion, have found it useful to conduct their business in crypto to make it more difficult for law enforcement to track them. It’s a safe bet that these criminal operations won’t be paying their crypto trading tax.
It’s often difficult to construct a solid case against the leading actors in crime rings. Potential witnesses can be intimidated into silence or killed. Evasion of a crypto trading tax can provide a useful alternative charge when it’s not possible to construct a compelling case for the underlying criminal business.
There is precedent for going this route. The notorious mob boss Al Capone didn’t go to jail for extortion, assault, or murder. He was convicted of income tax evasion. Evasion of a crypto trading tax may be a charge that will allow us to lock away many of our modern day Al Capones.
In short, a crypto trading tax is a way to collect revenue, reduce waste in the economy, and crack down on crime. It’s hard to do better than that.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Dean Baker is a senior economist and co-founder of the Center for Economic and Policy Research.
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