Bloomberg Op-Ed:  Crypto Doesn’t Deserve a Tax Exemption, by Tyler Cowen (George Mason; Google Scholar):

I am (mostly) bullish on crypto and (usually) skeptical of higher taxes, especially on capital gains. So why do I think it would be wrong to make crypto assets exempt from capital gains taxes, as President-elect Donald Trump’s administration is reportedly considering?

The most obvious argument against the proposal is simply that uniform taxation is better than selective tax exemptions. If a lower capital gains tax rate is preferable, then the goal should be to make a smaller cut that applies to all assets. Exempting a single kind of asset is likely to lead to abuses. You might think that boosting crypto is important now, but which sector or asset will be selected next for special treatment? It may be one you don’t think deserves it.

Overall, selectively low tax rates become a way of running fiscal policy off the books without requiring direct expenditures. In the long run, they create greater incentives for political lobbying and favoritism. Of course those are hardly new phenomena in the US, but why make them worse at the margin? …

In a world of tax-free crypto, those most likely to hold crypto are also among the least likely to have fancy lawyers to minimize their tax burdens. It would be better if the incentive to hold crypto were strongest for diversified, well-capitalized institutions with financial expertise.

Another issue is one of tax arbitrage. If crypto assets truly are not taxed on their capital gains, many other investment vehicles might, over time, be repackaged in crypto form. Rather than holding some equity in a company, why not hold a crypto token backed by that same company? That is hard to do under today’s laws and regulations, but it may well become easier under a Trump administration, which seems committed to the normalization of crypto. That normalization, however beneficial it may eventually prove, should not be allowed to serve as a way to dodge taxes. …

It is entirely appropriate to want to create a workable and predictable regulatory environment for crypto. But it’s important not to go overboard and give crypto preferential treatment.

Editor’s Note:  If you would like to receive a daily email with links to tax posts on TaxProf Blog, email me here.