They are milking people against gains that actually NEVER materialized.
But they did materialise. The trader made profit and that profit was available to realise. It's not the tax man's problem if he immediately threw it back in somewhere else. It's his responsibility to secure their share.
It's not crypto 'persecution', the same thing applies everywhere else too. If he were moving between currencies forex trading it may never be dollars but there still might be profits that are taxable in dollars.
I understand what you are saying. A lot of people just juggled alt-coins on these websites hearing about the insane stories of latest "collaborations" and "Proof of X" which would revolutionize crypto. A lot of people saw those 10X gains. Many were financially too naive to realize these things. If i consider myself in that situation, I would never consider the stupid bunch of 100 NXT, 200 OMG, 500 GNT and such obscure tokens sitting on my bittrex account as worth anything today. At that time they were worth a few 1000 USD. Its scary to think that these can be taxed retrospectively on being considered as returns (which eventually evaporated, of course). I no longer use that Bittrex account but it has some fractional worth of Alt-coins from the early days. They have blocked the account asking for KYC. The stupid "three shots, one front, left, right, holding a placard, lol its insane). Its also a sign that the exchanges have become institutions in themselves with full compliance. This escalated quickly.
The safest way is to follow what vapourminer said about keeping away some 20% realized profits for taxes. Sounds sensible enough. Anybody indulging in trading, even if they are financially unware students should do this.