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May 12, 2021

Heads I win, tails I win

When America sneezes the whole world catches a cold. Even, it seems, Bitcoin.

Many people believe that President Biden’s capital gains tax proposal caused Bitcoin’s fall in value below $50,000 for the first time in a few weeks. But travellers on Bitcoin’s road to hegemony should remember the words emblazoned on the Hitchhiker’s Guide to the Galaxy: Don’t Panic. Wherever the Biden administration decides to set taxes, Bitcoin will emerge stronger than before – although the same cannot be said for the US economy or its taxpayers.

It’s true that the Biden administrations’ plans to double the US long-term capital gains tax rate to almost 40% might look like a direct attack on Bitcoin, especially when so many institutions and individuals are using Bitcoin to protect their wealth from dollar depreciation. But the panic is unfounded for several reasons.

First, these are just proposals: the bill has to pass through Congress, and almost every president sees their legislative wings clipped through the rounds of bipartisan horse trading – even when they hold a majority in both houses. Secondly, of the two main ways this could play out, both are good for Bitcoin. Here’s how.

The likeliest (and most liberal) scenario is that Biden’s tax proposal will be whittled down to a less draconian figure that doesn’t penalise savers, institutions or corporations that have made substantial profits from their Bitcoin or other investments. Let’s remember that over half of US citizens hold shares, along with an unknown (and rapidly rising) number of crypto holders, so
there is only so much stomach for a precipitous tax hike. So it seems probable that capital gains will stay at a reasonably modest level, and that would have huge implications for Bitcoin.

How come? By taxing holdings at a sustainable rate, the US government would be tacitly admitting to at least one of Bitcoin’s societal benefits: the ability to generate tax income for the government of, by and for the people. Sure, it wouldn’t be an explicit endorsement – not that Bitcoin needs one – but it makes it that much harder to move against Bitcoin in the future. As they say in the States, “No taxation without representation”. Well, when it’s (sensibly) taxed, Bitcoin will have such a strong toehold in the US financial and political system, it will be incredibly hard to dislodge.

But let’s say the bill goes through largely unchanged, and US investors face a swingeing spike in capital gains tax. Under this scenario Bitcoin still prospers, albeit in a more circuitous way. Following the logic of the Laffer Curve, too much tax will simply cause capital flight as investors move their wealth to other jurisdictions with less punitive policies. And not just the institutions and high-net-worthers, but all the others who are inevitably caught up when a dragnet is cast too wide and too indiscriminately.

And wherever these investors fly, it’ll be to territories that are tolerant of Bitcoin, accelerating the shift in gravity away from the US and towards other nations – including, as I’ve argued before, the global South.

As I say, the second scenario is less likely, though it’s perfectly plausible. But how much better would it be for the US economy, its institutions, corporates and individual mom-and-pop investors if the Biden administration seized the opportunity to enable the public to profit from people’s private Bitcoin holdings in a sustainable way?

For Bitcoin, it’s a case of “heads I win, tails I win”. But there’s only one winning choice for US taxpayers. Setting capital gains at a sensible rate will enable the government to raise revenue and, to some extent, resist the urge to print more dollars. Bitcoin will triumph either way, but let’s cross our fingers and hope the US chooses the path that makes everyone a winner.

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