The Potential Pitfalls of Trump's Plan to Exempt Crypto Gains from Taxation

Following Donald Trump's inauguration, reports surfaced that his son, Eric Trump, confirmed plans to exempt U.S.-based cryptocurrencies from capital gains tax, while imposing a 30% tax on non-U.S. based ones. This move might seem like a boon for American investors, but it comes with significant drawbacks. The potential consequences for the global crypto industry are still uncertain. Several red flags are evident. Firstly, markets may experience turbulence once this rule is confirmed, as U.S. investors may sell non-U.S. cryptos, incur the tax liability, and shift their capital to domestic options, thereby increasing sell pressure on global projects, particularly those with substantial U.S. investor exposure. However, this would be the least of the concerns, as this change could have far-reaching, long-term implications for the entire crypto industry. Secondly, implementing this tax exemption before establishing sound regulations could be detrimental. The removal of capital gains tax on crypto investments could trigger a surge in the creation of new U.S. cryptocurrencies, similar to the 2017 Initial Coin Offering (ICO) boom, where nearly 80% of projects collapsed or turned out to be scams within two years. If the U.S. government removes capital gains tax before implementing clear regulations, it could lead to a repeat of that chaos on a much larger scale. A zero capital gains tax would likely attract U.S. retail investors who have never invested in crypto, drawn by the obvious tax advantage. However, if bad actors exploit this and take advantage of these newcomers, it could drive them away from crypto entirely. Thirdly, there is a potential risk of harm to the global crypto industry. While the U.S. is home to major crypto projects, it has also been a breeding ground for scam tokens. In 2024, the FBI issued a warning about criminals creating fake crypto tokens that mimicked legitimate ones, preying on unsuspecting investors. Moreover, global crypto startups may struggle to secure funding if U.S. venture firms start favoring local projects to maximize tax-free returns on token allocations, potentially draining investment from emerging markets where crypto is often used for real-world financial inclusion. This change could also lead to U.S. firms returning home after they left due to the SEC's enforcement-heavy approach under the Biden administration. Even if other countries adopt a similar approach with zero capital gains tax for local cryptos, it might backfire, flooding the market with new tokens, fragmenting trading, and reducing liquidity for most of them. In conclusion, the U.S. taking this approach risks distorting the market, incentivizing artificial token creation, and isolating American investors from the global crypto economy. What appears to be a tax break now might ultimately stifle competition, funnel money into scams, and damage crypto's credibility in the long run.