As expected, the Biden campaign has proposed a series of tax increases on the wealthiest Americans, in an attempt to fund a $1.7 trillion expansion of the federal government. The proposal, dubbed the “Biden Plan”, would tax all capital gains above $1-million at an effective rate of 39.6%. (In actuality, given the state and local taxes, that number would be closer to 43-44%.) This would affect nearly everyone who is “investing” in cryptocurrency, and would almost certainly lead to a massive selloff of anything that isn’t the US dollar.
There are often multiple reasons for a sharp drop in an asset, but the 10% plunge in bitcoin (BTC) that occurred on the 22nd. April was dominated by the Biden administration’s plan to tax capital gains twice as heavily as they are now for the wealthiest people in America.
Bitcoin is usually volatile, so it’s probably not worth reading too much into its double-digit rise in any given week, but this is a good time to think about the potential impact of capital gains taxes in the US and taxes in general on the future growth of cryptocurrencies and blockchain technology.
Could this affect adoption in the long run? If so, in what way? Given the vagaries of American politics, will Biden’s plan become a reality? How do you explain the eruption of a mini-market at the mere possibility of a tax increase in one country? What misconceptions might people have about the taxation of cryptocurrencies in general?
The price drop can likely be attributed to a number of factors and rumors – including the expiration of futures positions at the end of the month, which led to a liquidation of positions that triggered the decline, Marcus Veit, a partner in Grant Thornton LLP’s audit practice and head of the firm’s digital assets practice, told Cointelegraph.
There have also been reports, widely believed to be false, that Treasury Secretary Janet Yellen is leading efforts to impose an 80% capital gains tax on cryptocurrencies, as well as rumors that the U.S. Treasury Department is investigating financial institutions for illegal use of cryptocurrencies, which the DOJ, not the Treasury Department, is supposed to do, Weith continued: Comments were also made on the declining capacity of the Chinese mining industry.
A lot has happened this week
David Trainer, CEO of investment research firm New Constructs, downplayed the volatility of the BTC price, saying: 10% volatility is nothing new for BTC and crypto-currencies in general. For his part, Tyler Menzer, a CPA and doctoral student in accounting at the University of Iowa, noted: Although the tax news coincided with the downturn, it could be one of several factors.
But taxes are important. Biden’s] proposal would push the effective tax rate in some states above 50 percent, which would have a negative impact on job creation, Carlos Betancourt, co-founder of Miami-based BKCoin Capital, told Newsweek, adding that it would further accelerate the migration of states like California and New York to more tax-friendly states like Florida and Texas, which have no income tax.
Of course, the new administration is still in its infancy, and it is not clear whether the proposed doubling of the capital gains tax for the wealthiest to 39.6 percent will pass Congress unchanged, or whether the rate will ultimately be reduced.
Someone has to pay for all the stimulus, the deficit and the national debt, so it’s very likely you’ll see a tax increase in the near future – on capital gains or something else that hasn’t been decided yet, Mazhar Wani, a tax partner at PricewaterhouseCoopers in San Francisco, told Cointelegraph.
But Omri Marian, a law professor at the University of California Irvine School of Law, said the proposal is unlikely to pass in its current form. The Democratic majority in Congress is just too narrow to say the least, Marian told Cointelegraph. Chris Weston, head of research at Pepperstone Group, a currency broker, said: The current proposed numbers are unlikely to pass the Senate in their current form, and the center Democrats will not support the proverbial numbers.
But rumors aside, if the doubling of the capital gains tax passes through Congress unscathed, does that necessarily mean stormy times for cryptocurrencies and blockchain technology?
Maybe not. Nathan Goldman, an assistant professor of accounting at North Carolina State University, told Cointelegraph – after consulting with his co-author on BTC taxes, Christina Levellen – that the new capital gains tax is aimed at the wealthiest – those with annual incomes of more than $1 million – and is only paid when the digital asset is sold:
As a result, it is unclear whether the proposed changes will have a major impact on most cryptocurrency holders.
Nonetheless, taxes are likely to affect the price of bitcoin, Menzer said, and continued: We have a large body of previous research on a wide range of outcomes and aspects of life affected by tax rates, particularly in the financial sector.
They can also steer cryptocurrencies and blockchain technology in interesting directions. For example, Vani expects more volatility in the near term, as some investors will pull back if interest rates fall. However, in the long run, there could be more demand for theFiFi applications and other options for using collateral to create liquidity and avoid generating profits.
What about the grumbling over Yellen’s proposed 80% capital gains tax, which would be punitive and unprecedented? Goldman told Cointelegraph: I don’t think the rumors of an 80% capital gains tax on cryptocurrencies have any valid basis – a view expressed elsewhere. But some still think Yellen is not very hot on cryptocurrencies.
I think Yellen fundamentally doesn’t understand what bitcoin is, said Weston, who went on to say that it was strange to go after digital assets to protect yourself from criminal activity with an asset that leaves a trail, especially since cash is generally preferred in these types of transactions because it can’t be traced. The coach added:
I think Janet Yellen wanted to downplay crypto currency speculation. She believes that unbridled speculation, as seen in cryptocurrencies, is not good for investors or the underlying asset in the long run.
On the power gain problem in general, Menzner noted the following: To the extent that raising taxes would make it more expensive to use cryptocurrencies or use them for new purposes, that would be a setback. But, he added: This may also accelerate the use of Stablcoins for some cryptocurrency projects, as they are designed to minimize price fluctuations and thus minimize gains or losses from a tax perspective.
We don’t often look at taxes as a critical factor in the decision to exit, but they can determine when to exit; for example, when to take corresponding losses, when long and short holding periods have been reached, etc., Paul Beachy, tax partner at Grant Thornton LLP, told Cointelegraph.
Is US tax policy of global concern?
But to what extent is this only an American problem? Does what happens in the US in terms of tax policy really matter in Singapore or France, especially for an asset like bitcoin that is bought and held around the world?
Competitive advantage plays an important role here, Vani believes, adding: It is important that other countries adopt similar tax policies. In addition, he believes that other countries can try to become more competitive by offering more incentives – i.e. lower taxes – to attract more talent and businesses to this growing sector.
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 policy could cause real changes in the cryptocurrency economy. For example, many global exchanges exclude U.S. residents and citizens from trading because of U.S. policy, effectively separating non-U.S. traders from U.S. traders, which somewhat negates the idea that bitcoin or other cryptocurrencies are uniformly global.
According to Marian, this is important because if you are a US taxpayer, you will have to pay US taxes on your cryptocurrency transactions, no matter how you do them. It may be more difficult for the tax authorities to enforce your rights if you place your assets with a foreign custodian. But if you’re intentionally cheating, you don’t really care about the change in tax rate.
What’s really obvious is the lack of clarity around 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 increase in value of your cryptocurrency assets. For example, if you buy bitcoin on January 1, 2016 for $434 and sell it on April 1, 2021 to buy a Tesla car for $58,726, you must pay capital gains tax on the difference.
No hard and fast rules
Even more problematic is that there is no standard tax regime for all uses of cryptocurrencies. As Bisi said in an interview with Cointelegraph: If digital currency is held [in the United States] by individual investors as an investment, the tax rules for its purchase and sale are sufficiently clear, and the applicable capital gains tax should apply to digital currency transactions in the same manner as to other financial investments.
But if, on the other hand, digital currency is structured into more complex transactions, mimicking other, more esoteric financial instruments – such as derivatives, NFTs [non-functional tokens] and some securities tokens – then the tax rules for these digital currency transactions are not entirely clear, Beachy said.
Overall, the price swings in BTC last week were perhaps an overreaction to some preliminary tax plans, but that reaction was probably to be expected, given that regulation is clearly a big gray cloud generating concerns, as Weston notes, but as we’ve seen often lately, the market sells first, then reflects, and calmer heads tend to prevail.
Taxes are obviously a serious matter, and even if doubling capital gains taxes only directly affects the wealthiest, history shows that taxes can leverage growth in the long run – so be careful.
Taxation is a form of regulation, and the very fact that such discussions took place in the 12th century is a sign of its importance. As the year of cryptocurrencies draws to a close, it may be reassuring to know that the US has no intention of banning cryptocurrencies or trying to make them disappear. In fact, the net effect may be that acceptance increases as people feel safer, Mentzer said.
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