However, I am also confident in government's ability to facilitate cooperation on fund recovery, so I don't see why government couldn't be very convincing about handing over the private keys to undeclared btc.
Oh certainly. Quite convincing. But at least the gun is out on the table, for all to see.
Back in the good old schooldays, a teacher told us that the core distinguishing feature of a government is a monopoly, or near-monopoly, on violence.
So I don't think govenment is going to be shy about using violence to procure stuff that it "thinks" belongs to it.
Also, even if they fail to procure the keys, they could still send one to jail for tax offenses (and possibly a lot of bla-bla bla in regards to "transaction structuring" and whatnot)
Bitcoin is, essentially, equivalent to an unbreakable safe.
It can protect your wealth from
forced seizure (to a fairly large extent), but not from taxation per se.
Precisely. But when/if everyone has the viable option of saying "make me" when the government says "pay up," that's going to make the government's job a great deal more difficult.