The government of Bulgaria has started to investigate crypto exchanges to demand taxes from the profits investors generated from trading digital assets.

The National Revenue Agency (NRA) has categorized cryptocurrencies as financial assets, which incur a 10 percent tax on profit that individuals have to disclose annually.

Two Major Issues of Bulgaria’s Crackdown on Crypto Tax

Similar to Japan, the main problem with the NRA’s regulation of cryptocurrencies using the same policies used to govern existing investment vehicles is that it does not take into account the wild volatility of the emerging asset class.

Cryptocurrencies are still at their infancy and dominant digital assets like Bitcoin and Ethereum still demonstrate daily moves in the range of 5 to 15 percent. Within the past two months, the Bitcoin price has dropped from $6,500 to $3,600, by 44 percent.

Hence, if an investor in Bulgaria is required to declare profits on taxes on an annual basis before cryptocurrency holdings are cashed out, a substantial loss in the following year could result in a large negative return for the investor.

Japanese lawmakers have proposed a bill to amend the existing tax policy surrounding cryptocurrencies because investors in the crypto market often tend to see unexpected levels of volatility year after year.

Bulgarian authorities also consider crypto assets to be anonymous and have said that it is easy for investors to evade taxes in the crypto market.

However, contrary to popular belief, crypto assets by nature are not anonymous. The public blockchain network utilized by Bitcoin, Ethereum, and other major crypto assets allow anyone on the network to track transactions and wallets.

With the Know Your Customer (KYC) and Anti-Money Laundering (AML) systems integrated by regulated cryptocurrency exchanges, it is extremely difficult to hide or confine transactions from the authorities.

Bad Approach May Hurt Local Crypto Ecosystem

The 10 percent tax on profits is a relatively low tax rate in comparison to leading cryptocurrency markets like Japan and the U.S.

An aggressive approach to unravel the transaction history of many thousands of users in a short period of time could place significant regulatory pressure on startups.

For instance, in January 2017, Coinbase CEO Brian Armstrong said that it cost the company over $1 million to push back the request of the Internal Revenue Service (IRS).

Armstrong said at the time:

We will likely incur a legal cost of between $100,000 and $1,000,000 in the process of defending our customers from this overly broad subpoena; funds which could be put to better use building innovative products or hiring more employees. This heavy handed approach by the IRS punishes one of the good guys.

An efficient approach by the Bulgarian authorities, considering the low tax rate on crypto returns, would be to work with exchanges and investors in a civil way to ensure that the local cryptocurrency exchange market is not damaged by the initiatives of the NRA.