Even if a government legalizes cryptocurrency, they will not promote it. They will only focus on their fiat. Also, they will most probably create a separate tax class for cryptos and then impose heavy taxes on them. Overall, a government will never encourage its citizens to use an alternative currency over their currency. Exceptions are there but that will remain as an exception only.
This is true and I agree with you. Using the government of my country as an example, their reason for not legalizing cryptocurrency has always been our local fiat currency this is because they believe that citizens will abandon the use of the fiat if Bitcoin is accepted as a means of payments in my country. Moreover, if they should legalize cryptocurrency, people who make use of it will be overtaxed just as you said and no doubt citizens will be forced to continue using their Local fiat currency since they won't encounter much tax on the use of it for payment of goods and services.