People often ask how governments will tax cryptocurrency, I'm here to tell you they can't.

With the new wave of privacy oriented cryptocurrencies taking the market by storm it has become increasingly apparent that with their ubiquity governments will not be able to tax their citizens in any reliable manner. How can you expect a citizenry whose distaste for their government seems to grow with every passing moment to give away their hard earned cash when they know full well that they can get away with it? Every government requires money to function and since governments depend largely on taxation as a source of income this puts them in a very tough spot that many governments may not be able to survive long term.

They will try of course, governments have a wide and varied arsenal at their disposal, a few methods that come to mind include: Digital fiat, bans and market manipulation.

Digital fiat

Digital fiat would allow governments the same control they have over traditional fiat along with some of the advantages of cryptocurrencies. Bitcoin being the grandad of cryptocurrency also sets the standard. What benefit could a digital fiat provide when people are already abandoning traditional fiat that would lead to people adopting it as their primary form of currency when they could just use another currency that would protect their privacy just fine? It would also likely be more established by the time governments make their move, especially since cryptocurrencies have global reach.

Bans

A ban could be implemented at the ISP level in various manners and with the death of net neutrality in the US it would be trivial to limit access to webpages offering information and resources on cryptocurrency, and bills such as the SESTA would go a long way to preventing US citizens sharing information regarding it. That said, it would be impractical to ban something that has been adopted to such an extent already and that has proven so extremely useful, if governments thought policing intellectual 'property' violations was hard, they've got another thing coming. Users of cryptocurrencies could easily employ technologies such as I2P and TOR (both of which cryptocurrencies such as Monero and Verge are currently experimenting with) to circumvent the monitoring of cryptocurrency traffic, and such drastic action may lead to more people learning how to use such anonymity tools in order to make use of their funds. The only limit to how effective a ban would be is how educated the citizenry can become and the incentive to do so could be huge.

Market manipulation

Market manipulation could seriously damage cryptocurrencies, manipulating Bitcoin alone would have knock-on effects for other cryptocurrencies and would not be hard to achieve, comparatively small pump and dump groups have shown that even the layman can engage in some market manipulation of their own. This is probably the most subtle way for a government to take back control and is the method I expect less brazen governments (and banks for that matter) to employ.

Finally

Governments with enough foresight could of course choose to fully embrace this new frontier, setting up their own mining operations or repairing their relationship with citizens to the point where people willingly pay their taxes. Like currency, states can only function when people believe in them and as cryptocurrency takes hold people will quickly wake up to this fact.

Disclosure: I hold various cryptocurrencies including Monero.