The new proposed capital-gains tax hike and the reactionary market

This past Thursday, just as Ethereum was making an all-time high on the heels of the launch of its ETF in Canada, news broke that President Biden will propose a capital-gains tax hike for wealthy earners.

Word spread fast and the market immediately took notice. Many stocks gave up their recent gains, the Dow dropped 250 points, and Bitcoin, which had already begun a temporary cycle of correction, accelerated its sell-off to below $50,000. Bitcoin’s performance generally sets the trend for the crypto market, which was reflected in selling across the board.

The future proposal is not by any means subtle, stating that those earning a million or more could pay as high as 39.6% on investment profits, which is nearly double the 20% of the current tax base rate. The tax rate would apply to returns on taxable assets sold after more than a year, essentially making capital gains taxable as ordinary income. This is part of a larger tax hike set to affect those earning over $400,000 a year.

“Biden is expected to release the proposal next week as part of the tax increases to fund social spending in the forthcoming “American Families Plan” (Yahoo Finance).

Currently, profits on crypto investing and trades are all considered capital gains. Ironic, because crypto investors are selling as a reaction to the tax-hike news, creating taxable events.

While the announcement on the American Families Plan is set to come next week, it’s unclear exactly how soon or in how many stages this will be rolled out. Although tax gains to support American families are well-intentioned, many tin-foil hat economists and investors have a big looming question on their mind: Is nearly doubling the taxation on capital gains a way to help counteract the rising inflation that is occurring due to the printing of tens of trillions of dollars to stimulate the economy?

If you’re wondering why they wouldn’t just print more money to foot the bill of the new act, this could be why.

This thesis would fall under what is considered “Modern Monetary Theory,” arguing that governments create new money by using fiscal policy that can be later addressed by gathering and increasing taxes to reduce the spending capacity (Wikipedia).

Other economists fear this tax initiative will continue to push innovation and investors out of the country. This coming at a time in which the economy, already fragile and in recovery, needs an injection of productivity and progress.

Despite all of this, crypto investors remain hopeful. If this does go into effect, it could reinforce a cultural shift from trading to long-term holding of crypto assets and mitigate volatility in future.

The actual terms and effects of the proposal remain to be seen, but our current view shows that Bitcoin’s scarcity, Ethereum’s prominence, and crypto adoption continues to rise regardless. As the old saying goes: no pain, no gains.