10th December 2022 > > The EU and tax.

tl;dr

The taxman is all at sea but does not yet know it.

Market Snap

Market Wrap

That’s a lot of volatility in treasuries this week, which is never a positive background for risk assets. With the threat of energy blackouts looming in the EU and the UK, investor sentiment is unlikely to improve in the last few weeks of 2022.

Occasional Series – Another great meme from The Milk Road

https://themilkroad.beehiiv.com/subscribe?ref=o5CmCFhBAK

Curious Cryptos’ Commentary — The EU and tax

Great memes are only funny when they are true. And to prove this point, here comes the EU and its latest tax proposals:

https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12632-Tax-fraud-evasion-strengthening-rules-on-administrative-cooperation-and-expanding-the-exchange-of-information_en

If you only get as far as reading the summary, no-one can blame you. To make it easier, here it is:

“Tax fraud and evasion mean money lost, which could be used to pay for eg (sic) healthcare and education. Despite action taken in recent years, new alternative means of payment and investment threaten to undermine the progress made on tax transparency and pose substantial risks for tax evasion.

This initiative will amend the Directive on Administrative Cooperation (‘DAC’) to ensure that EU rules stay in line with the evolving economy and include other areas such as crypto-assets and e-money.”

The bureaucratic machinery of every government in the world feels threatened by the crypto revolution, and probably none more so than the taxman and his cronies.

Their fears are exacerbated by an over-reliance on news outlets such as the Financial Times, and the Wall Street Journal, in whose eyes one of the major use cases for cryptos is tax evasion. One cannot deny that in all areas of human endeavour there are individuals who seek to minimise their tax outgoings, not least when total tax takes are at decades long highs because of the fiscal incontinence of successive governments. But those who seek to do so are acting immorally and criminally, as that is their nature. It is not cryptos that make them so.

But there is a clear danger of over-reach, with too much focus on us the little guys, as illustrated in that meme above.

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This new “Proposal for a directive” puts the onus on companies to report ALL crypto transactions undertaken by clients based in the EU. This would apply to companies based outside of the EU.

The information required includes personal information, such as name, address, place of birth, and date of birth. Each crypto transaction will have to include any fiat operation, and any exchange between cryptos.

This is an extraordinary amount of information to have to provide, and frankly, impossible to process.

As an example, there can be some months during which I execute dozens of trades across up to ten different platforms, some centralised, some decentralised. It is an administrative task of Herculean effort that allows me to stay on top of my own trading activities. Given that 17% or so of the EU population own cryptos (that’s 75mm individuals) and a proportion of those are actively buying and selling across hundreds of platforms, it is not possible to track and trace each fiat input with each fiat output.

European Crypto Initiative President Simon Polrot made this very point:

“… the mass of information to be produced and sent will be enormous. Will [Member State] tax authorities have the means to process this information?”

I think not, Simon.

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The other gaping hole in this extremely ill-thought through initiative is that it is impossible to make DeFi (decentralised finance) applications follow the rules.

As cryptos become embedded in the payments system, for goods and services, governments will lose control over large swathes of their tax base, if they continue down this heavy-handed path of over-regulation of companies and individuals.

This will be a good thing, as the tax model moves away from its current complex code to a simple one of taxing sales revenues for all centralised organisations. That army of tax advisors, tax investigators, tax lawyers, and their ilk had better start training for a new career.