Bitcoin rebounded over $1,000 in less than a day, moving from $6,900 to over $8,000 on Thursday. It hadn’t been over $8,000 in two weeks and has settled around $8,000 over the past two days. There has been speculation and analysis that due to Bitcoin’s large price increase during 2017 that it created a large tax liability, and that some of the selling pressure over the past two weeks is due to investors selling it to pay taxes.
[Ed note: Investing in cryptocoins or tokens is highly speculative and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment.]
Since Bitcoin, and other cryptocurrencies, saw such huge gains in 2017, that means investors who sold them or used them to pay for items largely incurred short-term capital gains. Also mining Bitcoin and other cryptocurrencies generated current income and self-employment taxes per the IRS in a March 2014 notice.
How large could the tax liability be?
While Bitcoin’s and other cryptocurrencies have fallen in value during 2018, Tom Lee, Fundstrat Global Advisors’ Head of Research, estimates that they increased $590 billion during 2017. To determine the tax liability for U.S. Bitcoin investors these are his calculations.
$590 billion in value created in 2017
U.S. holders captured 30% of the value
Is a dollar amount of $177 billion
Since 1954 U.S. households realize 52% of capital gains in a given year
Which results in $92 billion taxable gain
He uses a 27% tax rate
For a $25 billion gain
Lee does not calculate an amount for self-employment taxes from mining
Impact on Bitcoin could be substantial or minimal
Lee calculates that for every $1 in U.S. dollar selling that it impacts the market value (think market cap, not price of Bitcoin) by $20 to $25. Bitcoin’s market cap was about $135 billion towards the end of March, per coinmarketcap.com. Over the next two weeks it fell to about $115 billion before it rebounded on Thursday. Per Lee’s calculation it would only take $1 billion of U.S. based Bitcoin selling to account for the $20 billion downdraft.