The crypto market was confronted with a sudden crash last Friday when BTC waivered against a selling bout that took the asset down by 7.9% to $47,525. The crash was fear fuelled by the panic-struck investors after a Bloomberg report featured Joe Biden’s intention of raising capital gains tax to 39.6%. While Bitcoin has gained back momentum, settling at almost $55k at the time of writing, the entire community is mumming with an impending question- “If” Biden’s tax proposal gets approved, what will it mean for the crypto investors.
Given the size to which the crypto market has grown in the past couple of years, various factors will play a part in the future predicament of cryptocurrencies. While the outrageous figures in Biden’s policy almost double the capital gains tax, it is expected to affect taxpayers who exceed $1 million in income each year. However, the fluctuating history and uncertainty of the future managed to pull the crypto market down, despite the bullish stance that stretched the global crypto market cap over a trillion dollars in 2021.
Panic Surrounding the Crypto Market
The possible imposition of a heavy tax reflected vividly on the crypto space, wiping over $200 billion from the overall crypto market on Friday. The panic threw the largest cryptocurrency by market cap under the bus, as BTC traded below $50,000 for the first time since the beginning of March. Other leading cryptocurrencies also took the plunge with Ether down by 8% to a little over $2000 and XRP sinking by 16%.
With Biden’s proposal expected to hit investors that are making over 1 million in capital gains, crypto whales sitting over their high bitcoin pile will probably have the highest negative impact among others. 2021 saw no shortage of a surge in institutions buying BTC with every dip. Long-term believers like CEO of MicroStrategy, Michael Saylor have publicly acclaimed their love for crypto along with their bitcoin treasure piling higher than anyone else. Moreover, other institutions including the digital galaxy, Grayscale, Tesla, etc. have high amounts of capital invested in BTC and other cryptocurrencies.
It is more than fair to assume that the institutions and crypto whales that have been warming their crypto wallets might be heavily exposed to the effects of Biden’s proposed tax hike. However, crypto analysts and experienced investors like Alex Kruger, who have witnessed several crashes in the crypto market stood calm and unconcerned with the correction and took on Twitter to clear the air.
This is a spot driven panic. Market is rangebound. In a rangebound market, price is bound to test the lows of the range. Market participants suffer from 2018 PTSD. Upcoming tax changes are bearish yet still TBD, far ahead and should have been expected as were part of Biden’s plan
— Alex Krüger (@krugermacro) April 23, 2021
However, new investors may have finally found their way into the market during the tax spooked panic.
Retailers’ Return to the Crypto Market
BTC soon gained back its price momentum after a brief correction this week, however, that shows little to any regard for panic demolition and more towards new investors entering the market with unreal hopes for high gains. A crypto analyst and investor by the name of SecretsOfCrypto tweeted about the sudden rush of new entrants into the market and also highlighted the bitter-sweet reality of the market.
I’m seeing too many new entrants to this market coming in with the expectation of making quick, easy money. The reality of crypto investing is that it is not all sunshine and roses. Not everyone can handle it. Yes you can make a lot of money but it takes work and nerves of steel.
— Secrets (@SecretsOfCrypto) April 26, 2021
The Crypto market entered 2021 in a bullish trend that left the previous all-time highs looking like a joke. While the already invested hodlers were basking in the glory and gains that came with institutional interest and growing acceptance of BTC, retailers and aspiring investors were hoping for a window to enter the bullying market.
With impractical expectations of making a mountain-sized profit in a short span of time, similar to the FOMO fuelled bubble of 2018, dumb money is behind the bounce after last week’s correction. However, the new entrants are inexperienced with very little knowledge of the crypto market. Such inexperience generally leads to investors selling their crypto for little profit instead of waiting for the right time.
Insignificant Impact of the Proposal
While nothing can be said for sure when it comes to predicting the future, the current facts and market outlook certainly draw heavily towards the positive days ahead for crypto in terms of acceptance, appreciations, applications, and of course, endless growth.
Moreover, the tax hike is a long way from being approved in its original form by the US Congress altogether, given the tiny fraction of the majority that Democrats have over Republicans in the US House of Representatives. Furthermore, even in the traditional US stock market, Biden’s policy won’t affect 75% of the US stock investors and holders with over $1 million worth of income from capital gains.
In 2018, over 150 million taxpayers filed tax returns with the IRS, out of which only almost 1% of the US taxpayers reported having income over a million dollars. In the deranged possibility of the bill being passed in its original form, a very small portion of those 1% taxpayers would be impacted by a higher tax bill on their long-term capital gains.
Why Crypto Investors Shouldn’t Be Concerned?
The very insignificant impact on a very small segment of taxpayers is the very reason why the crypto market might stand immune to the repercussions of the tax hike. Out of that small segment, even a smaller section includes crypto hodlers who are in possession of large long-term capital gains. The approval of the proposal and its implementation can take up to a year even longer, and the time gap might include fear-fuelled heavy crypto sell-offs after the approval but only to be followed by re-purchasing at a higher cost basis.
Moreover, participants in the market earning a generic amount of income of about half a million dollars in cryptocurrencies through staking, crypto mining, short term capital gains, etc. will only see a slight increase in taxes as Biden’s proposal also includes a 2.6% increase in the highest ordinary income tax rate.
It is important to note that the crypto market is still in its nascent state of regulation in the U.S. Hence, it is a high possibility that Biden’s administration is currently in the process of forming a regulatory framework for cryptocurrency. Crypto space has found itself amidst a spur of worldwide attention and appraisal with leading banking institutions like JPMorgan Chase, Fidelity, Goldman Sachs, etc., and several politicians in the U.S. embracing Bitcoin as an asset of high value and gains.