US tax rise worries drive cryptocurrencies sharply lower

US President Biden says he plans to nearly double capital gains taxes for people earning more than $1m a year.

Bitcoin has been one of the best-performing assets in recent years - anyone who bought it a year ago is sitting on a nearly 575 percent gain [File: Dado Ruvic/Reuters]

Cryptocurrency Ether pulled back sharply from a record high and rival Bitcoin also fell on Friday amid speculation that United States President Joe Biden’s plan to raise capital gains taxes will curb investment in digital assets.

The drops came after Biden on Thursday unveiled several proposed changes to the US tax code, including a plan to nearly double taxes on capital gains to 39.6 percent for people earning more than $1 million a year.

But while social media lit up with posts about the plan hurting cryptocurrencies, and individual investors complaining about losses, traders and analysts said declines are likely to be temporary amid growing retail and institutional investor acceptance of digital currencies as a legitimate asset class.

“That’s what everyone is talking about now,” Chris Weston, head of research at Pepperstone Markets Ltd, a foreign exchange broker based in Melbourne, told the Reuters news agency, referring to the tax plan.

“And I think you may have some technical selling going through. Ether’s been the poster child of movement. It has massively outperformed Bitcoin.”

Ether plunged more than 10 percent to as low as $2,140, a day after climbing to a record $2,645.97. It last traded down 6.5 percent at $2,243.95.

‘Susceptible to selling’

Bitcoin also weakened, falling 3.62 percent to $49,824.97, its seventh day of losses in the last eight.

Bitcoin price chart [Bloomberg]

JPMorgan Chase & Co and Tallbacken Capital Advisors LLC had recently warned there was potential for further losses after the largest cryptocurrency fell back from its record high of $64,870 on April 14.

US investors in the digital asset, which has advanced more than 70 percent this year despite its recent pullback, already face a capital gains tax if they sell the cryptocurrency after holding it for more than a year.

But the coin has been one of the best-performing assets in recent years – anyone who bought it a year ago is sitting on a nearly 575 percent gain. For investors who bought in April 2019, it is roughly 800 percent.

“One of the biggest things you have to worry about is that the things with the biggest gains are going to be most susceptible to selling,” said Matt Maley, chief market strategist for Miller Tabak + Co. “It doesn’t mean people will dump wholesale, dump 100% of their positions, 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.”

Source: News Agencies