There are often multiple causes for an asset’s sharp decline, but Bitcoin’s (BTC) 10% “nosedive”, which occurred on April 22, can be attributed to the Biden administration’s reported plan to tax capital gains by double the current rate on America’s richest. .
Bitcoin is usually volatile, so one should probably not read too much in a double-digit swoon in any given week, but this could just as well be a place to consider the potential impact of the capital gains tax in the United States, and taxes in general, on the future growth of cryptocurrencies and blockchain technology.
Could it hinder adoption in the long run? If so, in what ways? Given the whims of American politics, will the Biden plan even pay off? How do you also explain the eruption of the mini-market in the light of the single possibility? of more taxes in one country? What kinds of misconceptions can we harbor regarding crypto tax in general?
“The price drop can probably be attributed to a number of factors and rumors – mainly the month-end expiration of future positions, resulting in a liquidation of positions causing a decline,” said Markus Veith, a partner in the audit practice at Grant Thornton LLP and leader of the company’s digital assets practice, Cointelegraph said.
There were also reports, widely believed to be false, that Secretary of the Treasury Janet Yellen took the lead in an attempt to impose an 80% tax rate on capital gains on cryptocurrencies, ‘as well as rumors that the U.S. Treasury’s investigated financial institutions for illegal use of cryptocurrencies. what the DoJ would do, not the Treasury, ”added Veith, continuing,“ Then there were also comments about a decline in Chinese mining capacity. “
A lot happened that week
David Trainer, CEO of investment research firm New Constructs, downplayed BTC’s price swings, stating, “10% volatility is nothing new for BTC and crypto in general.” Meanwhile, Tyler Menzer, a CPA and PhD student in accounting at the University of Iowa, noted, “While the tax news has coincided with the decline, it may be just one of many contributing factors.”
But taxes are important. “The [Biden] proposal would bring the effective tax rate to more than 50% in certain states and would be detrimental to job creation, “Carlos Betancourt, co-founder of BKCoin Capital in Miami, told Newsweek, adding,” and would cause the relocation of states continue to accelerate. such as California and New York to more tax-friendly states such as Florida and Texas that have no income tax. “
This is of course still an early stage in a new administration, and there is the question of whether a doubling of capital gains on the richest to 39.6% – as proposed – will even come intact through Congress, or if that percentage will eventually happen. . are reduced.
“Someone has to pay for all stimulus, deficits and sovereign debt, so it’s very likely you’ll see a tax increase in the near future – whether it’s capital gains or something else, has yet to be decided,” Mazhar Wani, a PricewaterhouseCoopers- tax partner in San Francisco, said Cointelegraph.
However, Omri Marian, a law professor at the University of California, Irvine School of Law, said the proposal is unlikely to be accepted as it stands. “The Democratic majority in Congress is just too narrow for this,” said Marian Cointelegraph. Chris Weston, head of research at the Pepperstone Group – a forex broker – said, “The figures currently being proposed are unlikely to pass the Senate in their current form, and centrist Democrats will not support the touted figures.”
But putting the rumors aside: If a doubling of the capital gains tax passes through Congress intact, would that necessarily mean stormy weather for cryptocurrencies and blockchain technology?
Maybe not. Nathan Goldman, assistant professor of accounting at North Carolina State University, told Cointelegraph – after consulting with his co-author on BTC tax matters, Christina Lewellen – that the new capital gains taxes are geared toward the wealthiest – those with more than $ 1 million in annual income – and they would only be paid on the sale of the digital asset:
As a result, it is not clear whether the proposed changes would significantly affect most cryptocurrency holders.
Still, “taxes are likely to have an effect on Bitcoin prices,” Menzer said, as we continued, “as we have done much earlier research on a wide variety of outcomes and aspects of life that are affected by tax rates, especially in the United States. financial sector. . “
In addition, they could push crypto and blockchain technology in some interesting directions. Wani, for example, would expect “more short-term volatility as certain investors pay out at the lower rates, but in the long run you may see more demand for DeFi applications and other collateral to create liquidity and avoid gains.”
How about murmuring around Yellen’s so-called 80% capital gains tax – that one would be “punitive and unprecedented”? Goldman told Cointelegraph, “I don’t believe the rumors of an 80% capital gains tax on cryptocurrency have any great merit” – a view echoed elsewhere. But some still believe that Yellen hasn’t really warmed to crypto.
“My own view is that Yellen is essentially not getting Bitcoin,” said Weston, continuing, “and to protect digital assets from criminal activity in a record-setting possession is strange,” especially since cash is usually the preferred in such transactions. , given the untraceability. Meanwhile, Trainer added:
“I think Janet Yellen wanted to minimize cryptocurrency speculation. She believes that rampant speculation, like what we’re seeing in crypto, isn’t healthy for investors or the underlying asset over time. “
Regarding the value added issue in general, Menzner noted, “To the extent that higher taxes make it more expensive to use cryptocurrency or use it for new purposes, it will be a setback.” However, he added, “It could also accelerate the use of stablecoins for certain cryptocurrency projects, as they are designed to minimize price fluctuations and thus minimize any profit or loss from a tax standpoint.”
“We don’t often see tax as the decisive decision whether or not to leave a position, but it can be a driver when an exit occurs; for example, if there are corresponding losses to be harvested, when long / short term periods are met, etc., ”Paul Beecy, tax services partner at Grant Thornton LLP, told Cointelegraph.
Does US tax policy matter worldwide?
But to what extent is this all a matter of the US alone? In Singapore or France, does it really matter what happens in the US with regard to tax policy – especially for a globally bought and held asset like Bitcoin?
“Competitive advantage is central here,” said Wani, adding, “It is important that other countries follow similar tax policies.” He also believes other countries could try to become more competitive by providing “more incentives – that is, less taxes – to bring more talent and companies from this growing industry to their jurisdictions.”
“The only thing I can say definitively about the impact of US tax policy on cryptocurrencies is that we don’t know,” Menzer added, but “US policies can bring real changes to the cryptocurrency economy.” Many global exchanges do not allow US residents and citizens to trade, thanks to US policies, for example, “effectively separating non-US merchants from US merchants, somewhat demolishing the idea that Bitcoin or other cryptocurrencies are uniformly global. “
It’s important, Marian said, because “if you are a US taxpayer, you owe US taxes on your crypto transactions, regardless of how you make them. It can be more difficult for the IRS to enforce enforcement if you keep your assets with a foreign custodian. But if you cheat on purpose, you wouldn’t care much that the tax rates would change. “
What does seem clear is the lack of clarity regarding taxes and cryptocurrencies, starting with the common misconception that you don’t have to pay taxes on cryptocurrencies. According to Goldman:
“You still have to pay taxes on the valuation of your cryptocurrency assets. For example, if you bought a single Bitcoin for $ 434 on January 1, 2016 and used that Bitcoin to buy a Tesla on April 1, 2021 – worth $ 58,726 – you owe capital gains tax on the difference. ”
No set rules
Even more problematic is that there is no standard tax treatment for all cryptocurrency uses. As Beecy told Cointelegraph, “When digital currency is held [in the U.S.] By individual private investors as capital goods, the tax rules for buying and selling them are reasonably understood, and the capital gains tax that applies should affect digital currency transactions in a way that is very similar to other financial capital goods. “
But when digital currencies, on the other hand, are structured as part of more complex transactions’ and mimic other and more esoteric financial instruments such as derivatives, NFTs [nonfungible tokens], and certain security tokens – then the tax rules for those digital currency transactions aren’t really clear, ”Beecy said.
All in all, last week’s exchange rate swings in BTC may have been an overreaction to some preliminary tax plans, but this response was likely predictable, given that “regulation is clearly a big gray cloud” raising fear, as Weston noted, “but as we did. Often seen lately, the market sells first, thinks about it, and generally calmer minds prevail. ”
Taxation is serious business, of course, and even if doubling the capital gains tax only directly affects the richest, history shows that taxes can leverage long-term growth – so you have to pay attention.
Taxation is a form of regulation, and the mere fact that these kinds of discussions are taking place in crypto’s only 12th existence may give some confidence that the US is not going to ban or attempt to “ shut down ” cryptocurrencies. Indeed, the net effect would be an “increase.” [in] adoption because people feel more confident, ”says Menzer.