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Biden's Proposed Reforms Could Negatively Impact Crypto Investors

David - Cryptocurrency Specialist    

Recently, the Biden administration proposed changes to crypto tax treatment and capital gains taxes, which could have negative consequences for investors. These changes are aimed at reducing the deficit by almost $3 trillion over the next decade and raising around $24 billion from crypto tax treatment. However, while these reforms may have positive implications for the government, they could have negative effects on crypto investors.

  1. The Wash Sale Rule: A Change That Could Harm Investors

The proposed application of the wash sale rule to crypto could end a popular strategy used by traders to sell and immediately buy digital assets for tax purposes. This strategy is not allowed when stocks and bonds are involved, but crypto is currently exempt from these rules. If the rule is applied, many crypto investors who entered the market on the back of 2021 market peaks and are already suffering from heavy losses could face even greater losses.

For example, let's say an investor bought Bitcoin at $60,000 in March 2021 and then sold it at a loss for tax purposes at $30,000 in December 2021. Currently, the investor could immediately buy Bitcoin back at a lower price to continue to hold their position. However, if the wash sale rule is applied, the investor would have to wait 30 days before buying back trusted Bitcoin to avoid violating the rule. During that time, Bitcoin price could potentially rise, leaving the investor worse off than if they had been able to buy back immediately.

  1. Capital Gains Tax: A Barrier to Investment

The doubling of capital gains tax for certain investors making at least $1 million may discourage investment in digital assets. This tax rate increase would make long-term investments significantly less profitable and could cause some investors to shift their investment focus to other areas. This could lead to a decrease in demand for crypto and a reduction in its overall value.

For example, let's say an investor bought Ethereum at $2,000 in January 2021 and sold it at $4,000 in December 2021, realizing a capital gain of $2,000. Under the current tax rate, the investor would owe $400 in taxes (20% of the gain). However, under the proposed tax rate increase, the investor would owe $792 in taxes (39.6% of the gain). This increase in taxes may make cryptocurrency investment less attractive to certain investors.

  1. Corporations and Wealthy Americans: A Potential Roadblock for Crypto Adoption

The proposed increase in income levies on corporations and wealthy Americans could also harm crypto adoption. This is because these groups are often major investors in digital assets and may be less likely to invest in them if they face higher taxes. Additionally, these groups often have a significant impact on the overall economy, and any negative effects on them could also negatively impact crypto markets.

For example, let's say a large corporation holds a significant amount of Bitcoin as a reserve asset. If they face higher taxes, they may be more inclined to sell off their Bitcoin holdings, which could cause a drop in the overall value of the cryptocurrency.

While the Biden administration's proposed reforms may be aimed at reducing the deficit and raising revenue, they could have negative implications for crypto investors. The application of the wash sale rule, the doubling of capital gains tax, and the increase in income levies on corporations and wealthy Americans could all harm the adoption and growth of digital assets. It is essential for the government to consider these potential consequences carefully and work to create policies that support both economic growth and investment in emerging markets like crypto.

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