critical issues on the increase of crypto taxes

The Banca d’Italia indicates risks in the increase of crypto taxes to 42%, highlighting how the measure could have a minimal impact on revenue but incentivize evasion by transferring activities to foreign operators.

Let’s see all the details in this article. 

Bank of Italy criticizes the effectiveness of the measure on crypto taxes to increase tax revenue

The recent proposal to increase the taxation on profits from crypto activities to 42% has raised numerous questions and concerns. 

During the hearing on the Budget Law, the Bank of Italy expressed its concerns regarding this measure, highlighting that it could lead to opposite results to those desired by the government.

If the objective is to increase tax revenue, the Bank of Italy has warned that the effect might instead be “negligible.” 

Furthermore, the central bank fears that such high taxation may push investors to hide their assets or turn to non-EU platforms. 

Further complicating the monitoring of crypto activities and reducing the effectiveness of fiscal regulation.

According to the Banca d’Italia, the increase of the rate from 26% to 42% on gains made through cryptocurrencies would lead to only a marginal increase in tax revenue. 

This could be attributed to the fact that many investors, discouraged by the excessively high taxation, would prefer to transfer their assets to foreign platforms or completely avoid declaring their earnings. 

The central bank highlights how an overly burdensome tax imposition on such a fluid and international sector as that of cryptocurrencies could prove to be counterproductive. 

Leading consequently to a capital flight and effectively reducing the available tax base.

The “negligible” effect on revenue, reported by the Banca d’Italia, therefore makes the effectiveness of this fiscal measure for the State’s budgets doubtful. 

Without adequate international regulation and effective control tools, excessive taxation could only encourage elusive practices. 

Furthermore, it could even make crypto-assets disappear from the Italian jurisdiction, moving them towards more tax-friendly territories.

The risk of regulatory instability

The Banca d’Italia also emphasized how a sudden increase in taxation could generate a perception of regulatory instability in the crypto sector, already characterized by volatility and uncertainty. 

Sudden and heavy changes in tax rates create a climate of distrust and uncertainty for investors and businesses operating with crypto-assets, making it more difficult to plan long-term investments.

Furthermore, regulatory instability risks damaging the development potential of a solid and regulated crypto ecosystem in Italy, driving away talents and innovative businesses.

With a clear and stable regulatory framework, the cryptocurrency sector could instead contribute positively to the economy, attracting investors and companies in the blockchain sector.

The tightening of tax rates, on the other hand, risks damaging this potential, making Italy less competitive compared to other European and global countries that are adopting more flexible and encouraging regulations.

One of the main risks, highlighted by the Bank of Italy, concerns the transfer of crypto-assets to non-EU operators, a strategy that could become common to avoid excessive taxation. 

The ease with which cryptocurrencies can be transferred to other jurisdictions makes this possibility plausible. 

Investors, instead of facing a 42% tax imposition, could simply decide to move their activities to foreign platforms, out of reach of the Italian tax authorities.

This trend could generate negative effects not only from a fiscal point of view, but also from the point of view of security and transparency of the Italian crypto market.

As a result, the regulation would have the opposite effect compared to the desired one. 

Alternatives for Effective Regulation

In light of these considerations, many experts suggest that Italy should consider alternative approaches to regulate the cryptocurrency sector without discouraging investors. 

One possibility could be to introduce more moderate tax rates and to promote incentives for those who choose to declare their crypto activities transparently. 

A system of progressive taxation, which takes into account the volume of transactions or the duration of the investment, could represent a balanced solution that ensures stable revenue without excessively penalizing investors.

Furthermore, to limit the transfer to foreign operators, it would be useful to promote a collaboration closer with other European and international tax authorities.

In order to create a shared regulatory framework that makes the export of crypto-assets less convenient. 

A common agreement in Europe for a uniform regulation of cryptocurrencies could represent an effective deterrent against tax evasion and promote the creation of a regulated and secure crypto market within the EU.