(Andrew Harnik / Associated Press)
There’s always someone looking to spoil a party, and for crypto enthusiasts, President Biden’s latest proposal for 40% taxes on capital gains for wealthy investors had many looking for the exit. Crypto investors on all fronts were already concerned with taxes on their incredible return on investment, with bitcoin up 579% and ether gaining 1,092% within a year.
As tends to be the case in the volatile crypto market, investors overreacted and sold, sending BTC below $50,000 (not long after it hit its all-time high of $65,000). Interestingly, most of the bitcoin sell-off seemed to be in the spot market (where speculators and institutions place price bets without actually owning any crypto).
“Crypto speculators” spooked, sell
Cryptonews had an interesting perspective on the sell-off, editorializing that the speculative tax hike spooked “crypto speculators” out of the market. Considering that most of the selling happened in the spot and derivatives market, that’s quite possibly true. (And if you thought crypto taxes were confusing, you wouldn’t believe how much worse futures and options tax rules are.)
So, the question really is, who sold? As one Redditor put it:
No to whales selling. Yes, to paper handers that are worried about volatility.
Bitcoin Magazine described the capital gains tax hike as, “further incentivizing bitcoin HODLers.”
That is one potentially simple, elegant solution to the concern.
Short term price movements vs. long term value propositions
Since that initial hysteria, prices bounced back to $55,000 not long after. Crypto may be in what could become a permanent bull market. Even so, if history is any guide, we can expect plenty of short-term bearishness (not unlike the occasional massive drop in the stock market).
While crypto and stocks are two markets essentially on the opposite end of their respective bull runs, there were still some inferences to be made from equities. Stock traders had a far milder reaction to the news, reinforcing doubts over whether such a proposal could ever come to pass. On the other hand, the stock market is a much larger and more liquid market overall, generally less volatile.
Here’s another observation regarding the current environment…
For most of crypto’s history, a BTC slump would invariably pull all other altcoins down as a result, leaving crypto traders without much to do but either liquidate for the time being or wait for another uptrend.
Now, as bitcoin sits some 20% off its all-time high, Ethereum has just posted a new peak above $2,700. Maybe cryptocurrency prices are decoupling, becoming less inextricably linked?
If that’s indeed the case, higher capital gains taxes would be even more punitive for a savvy trader wishing to, say, buy the bitcoin dip while selling the ether peak.
The true crypto investor, one who sees that bitcoin and ether as long-term investments: what should they do? There are choices:
- Resign yourself to paying the IRS even more on every taxable transaction
- Hold forever, never selling or exchanging
- Invest in cryptocurrencies within a digital IRA
In an IRA, capital gains are a non-issue until distributions are taken out in retirement. Cryptocurrencies and other investments (yes, a digital IRA provides access to traditional assets as well) appreciate tax-free. Even better, buying and selling within an IRA isn’t a taxable event.
In short, if trading cryptocurrencies against one another becomes more and more attractive, it might be smart to take advantage of a digital IRA’s tax-free trading environment. Instead of paying capital gains taxes, after retirement distributions from an IRA are taxed as regular income (when most of us have a great deal less income, and therefore enjoy a lower tax bracket.) Regardless where capital gains taxes go, this may be exactly what the crypto investor needs.