Italy's getting cold feet about its crypto tax hike. The Italian government is backpedaling on its plan to jack up the tax on cryptocurrency capital gains from 26% to a whopping 42%.

Just a couple of months ago, the Italian government was all gung-ho about this tax increase, thinking it'd be a great way to fill up the state coffers. But now, they're singing a different tune. It seems they've realized that trying to squeeze crypto investors too hard might just push them into the shadows – or worse, send them packing to crypto-friendlier shores.

Giulio Centemero and Federico Freni, two lawmakers from the co-governing League party, spilled the beans on this U-turn. They said the tax hike will be "significantly reduced" during parliamentary discussions.

This change of heart isn't just because Italian politicians woke up one day feeling generous. The crypto community in Italy has been raising a ruckus about this proposed tax hike. They've been warning that such a steep increase could lead to a mass exodus of crypto investors and businesses. After all, who wants to stick around when nearly half of their gains are going to the taxman?

The Italian government seems to have gotten the message. They're now talking about finding a balance between filling the state's piggy bank and not scaring away the growing crypto community.

Let's break it down a bit. Currently, Italy taxes capital gains from cryptocurrencies over €2,000 at 26%. That's already a pretty hefty chunk. The proposed hike to 42% would have put Italy at the top of the European crypto tax leaderboard – not exactly a prize you want to win if you're trying to attract digital innovation.

This isn't just about HODLers trying to keep more of their gains. The crypto industry in Italy has been growing, and there's a real fear that such a high tax rate could stifle innovation and push businesses into the underground economy.

Adding another layer to this is the upcoming implementation of the EU's Markets in Crypto-Assets (MiCA) regulation. This new framework is set to create a unified regulatory environment for cryptocurrencies across the EU. Italy, like other EU countries, is gearing up for this change.

The Italian government passed new laws earlier this year to pave the way for MiCA. They've been trying to strike a balance between regulation and innovation. But this tax hike proposal seemed to tip the scales a bit too far in one direction.

A well known crypto accountant, Stefano Capaccioli, even found a potential loophole in the existing tax law. He argued that due to a technicality, the current tax rate on crypto gains should actually be 12.5%, not 26%.

The revised budget proposal, including this softer stance on crypto taxation, is expected to be finalized and presented to parliament for approval by the end of December. It's going to be a nail-biter for the Italian crypto community as they wait to see what the final numbers will be.

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