CRYPTOCURRENCIES FALL DUE TO POSSIBLE BIDEN CAPITAL GAINS TAXATION
Cryptocurrency prices have fallen across the board, ending a recent rally for ETH and pushing BTC below the $50,000 mark on concerns that United States President Joe Biden’s plan to raise capital gains taxes will curb investments in digital assets. At moments like this, it’s important to step back and look at the massive gains this year, even if we include the recent decline. BTC has already done this in the past. The coin fell from $57,000 to $45,000 in a week in late February. Two weeks later, it surpassed $60,000 for the first time. Is history going to repeat itself this time?
What is the impact of the U.S. raising capital gains tax rate?
It is understood that the tax policy is not only targeted at corporations, the Biden administration also plans to raise taxes on high-income groups. The capital gains tax rate for wealthy individuals with annual incomes of $1 million or more is to be raised to 39.6% from the current 20%, but the plan has not yet been made public. Once actually implemented, the policy will overturn the long-standing clause in the tax code that “the tax on capital gains is lower than the tax on labour”.
Apart from the impact on the cryptocurrency market, the Biden administration’s tax hike plan is bad for US equities, as the corporate tax hike will seriously affect the financial situation of companies. After the tax increase, the government will withdraw many funds from the market and affect the flow of market capital.
However, the benefits of the tax increase are also obvious. It can reduce the government’s budget deficit. To boost the economy under the pandemic, a total of $5 trillion has been invested in fiscal stimulus programmes in three rounds from 2020 to date. The Biden administration is currently implementing a major infrastructure plan of $2.25 trillion and is considering a new round. According to statistics, the current round of fiscal stimulus has far surpassed the time of the subprime mortgage crisis and is the highest since the Roosevelt New Deal in the United States. The current US fiscal deficit has reached a record high. Some analysts predict that the US fiscal deficit will reach $3.3 trillion this fiscal year, a 6.5% increase over the previous fiscal year.
These tax increases would help fund Mr. Biden’s anti-poverty and education proposal to be announced this week. In the past year, millions of Americans have lost their jobs and income, but the wealth of the 650 billionaires in the United States has increased by $1.3 trillion. After raising taxes on the rich, statistics show that the after-tax income of the top earners, who are among the top 1% in the US, will fall by 13%-17.8%.
Crypto market and U.S. stocks ushered in a plunge
As soon as the news about the capital gains tax increase came out, although there was still a lot of uncertainty about whether it could be implemented, wealthy investors began selling stocks and cryptocurrencies as well as other investment products due to the expected increase in the tax rate in the market, and the appetite for future transactions would also decrease. The overnight market showed that the Dow Jones quickly dipped from 34,126 points in intraday trading to hit a low of 33,717 points and plunged about 400 points in intraday trading. Towards the end, the Dow Jones recovered and closed down 0.94% or 321.41 points. Cryptocurrencies such as Bitcoin also saw a sharp decline and the gains of the last two months were wiped out overnight.
The current US government imposes high taxes on capital gains, which has a significant tax distorting effect: For example, if we bought Bitcoin in the past, it meant that we were willing to bear the risk of losing 50% of the capital to receive 80% of the capital gains; after taxation, you have to bear 50% of the risk of loss but only receive 40% of the original half of the capital gains; then many institutional investors will choose to sell cryptocurrencies to avoid high taxes in the future. Therefore, both US equities and cryptocurrencies have seen a significant drop to avoid the heavy taxation of capital gains that may occur in the future.
However, even though it has caused a big drop in the crypto market in the short term, cryptocurrency investments are good in the long term, and this will only encourage more people to move their assets into digital currencies, which are difficult to track.
Today, the cryptocurrency market has recovered from the weekend’s losses; BTC (+7.88%) is consolidating near $52,000 and gaining momentum towards $54,000, which has served as a key support and resistance level over the past seven days. If it manages to break through this key resistance, there is a chance of a renewed rise above $54,000. This territory has been tested several times in the last ten days.
Ethereum has climbed nearly 10% since the morning low and appears to be largely stable between $2,400 and $2,500. Dogecoin (DOGE) (-2.62%) is the only one that is significantly underperforming, in contrast to the percentage gains of its peers, and is finding no support.
CRYPTO ASSET MARKET PERFORMANCES
Despite what prevailed in the markets during the last period of considering digital currencies as one of the safe havens, especially after most digital currencies achieved record levels and after a currency such as Bitcoin managed to break the barrier of 1 trillion dollars, digital currencies hit a violent downturn that sent Bitcoin to below $50,000 Dollars after approaching the levels of
$65,000, and thus the return of the bubble thesis to impose itself on the market again in the midst of strong selling waves.
Although alternative digital currencies have benefited in recent times from the rise of bitcoin, we are now seeing a wave of decline in all digital currencies in general, and the reason for this may lie in the strong decline of digital currencies in a rising trend of
governments taking anti-digital currency positions.
For example, Turkey’s central bank has banned the trading of digital currencies and prosecuted
those responsible for one of the largest digital currency trading platforms in the country, the
Thodex platform, and the Seoul government has also withheld its cryptocurrency assets,
estimated at $22 million, belonging to individuals and companies, claiming they are using them
to evade taxes.
So, despite the emergence of big corporate names buying digital currencies, such as Tesla and
others, and the tendency of many electronic payment service provider companies to pump in
investment to support digital currency payments, on the other hand, investors’ concerns about
losing their money due to sharp fluctuations or confiscation are rising. Therefore, digital currencies will remain in this battle until they become more prevalent in economic transactions,
thus forcing governments to deal with them and legalise them, which will also be negative for
digital currencies as a quick source of profit due to their wild fluctuations, but in the short term, the control of the currency bulls is expected to continue. Digital in particular has opened the door for cryptocurrency platforms to register on the American stock exchange, providing a near-
certain channel for many investors, so the current sharp downturn will be followed by a sharp rise in the major currencies.