You are forgetting that capital gains tax applies to cypto-to-crypto trades. Meaning, if you buy 10 ETH with 1 BTC, then sell the 10 ETH later for 1.2 BTC, you need to pay capital gains tax on whatever the dollar value of 0.2 BTC was at the time of the trade. This is super hard for the government to track.
You are forgetting that the government doesn't need to track your capital gains, you do.
Any gains you can't prove are capital gains (or more specifically, are long-term capital gains, or collectibles gains) are treated as ordinary income.
Moreover, the government doesn't need to track your initial purchase price. You do. If you can't, you are treated as having paid $0 for the cryptos and are taxable on all gains.
> if you buy 10 ETH with 1 BTC, then sell the 10 ETH later for 1.2 BTC, you need to pay capital gains tax on whatever the dollar value of 0.2 BTC was at the time of the trade. This is super hard for the government to track.
This shows how invasive the income tax is. I would argue that any effective enforcement scheme for taxes on entirely digital exchanges would require banning public key cryptography.
In any case, these types of transactions are extraneous to those tax authorities tax now, so I don't see tax revenue declining as a result of these going untaxed.
