U.S. President Joe Biden has proposed almost doubling the capital gains tax for the wealthy, which may have contributed to bitcoin’s (BTC) already sliding price.
The tax hike on the wealthy will help pay for a slew of social spending that addresses long-standing inequality, according to a Bloomberg report.
As cryptocurrencies develop as an asset class, the Internal Revenue Service (IRS) has taken notes as well. The agency began asking crypto users to disclose transactions on their 2019 individual tax returns. Form 1040, asks taxpayers whether they “received, sold, sent, exchanged, or otherwise acquired any financial interest in any digital currency.”
U.S. cryptocurrency investors face a capital gains tax if they sell the cryptocurrency after holding it for more than a year. The IRS treats cryptocurrencies more like property than currencies.
“It is clear that bitcoin is more sensitive to capital gains tax threats than most ‘asset’ classes,” said Jeffrey Halley, senior markets analyst at OANDA. “The threat of regulation, either directly in developed markets or indirectly via the taxman, has always been crypto’s Achilles’s heel, in my opinion,” he added.
Spooked into profit taking
Michael Hewson, chief market analyst at CMC Markets, said the tax announcement affected the recovery of the shaky crypto markets. Although he said that higher tax prospects are unwelcome, “the likelihood of anything of this nature passing through an evenly split Congress, lies somewhere between slim and none.” Still, in the midst of current volatility, he added that “it doesn’t take much to spook a little bit of profit taking.”
Chief market strategist for Miller Tabak + Co. Matt Maley reiterated the profit taking sentiment. As bitcoin has risen spectacularly over the past year he said that many are likely concerned over losing that edge. “It doesn’t mean people will dump wholesale, dump 100% of their positions,” he said, adding, “But you have some people who have huge money in this and, therefore, a big jump in the capital gains tax, they’ll be leaving a lot of money on the table.”
Bitcoin’s momentum struggles
As bitcoin continues its downward slide, many are concerned over the loss of its momentum, which previously kept it buoyant.
According to research by JPMorgan strategists, momentum signals could collapse if bitcoin fails to surpass $60,000 again soon. The strategists say that bitcoin’s momentum decay is more advanced, at this point, making it harder to reverse. They also mentioned that flows into bitcoin funds appear weak.
“Bitcoin has slipped below the 50-day moving average support that it held sacrosanct through this rally,” said Pankaj Balani, CEO of Delta Exchange. “It looks like there is more downside here.”