By CCN Markets: President Trump has been bandying about the idea of reforming how capital gains are calculated. What impact, if any, would those changes have on Bitcoin investors?
When you sell stocks, bonds, or even Bitcoin, the profits you receive are considered capital gains, according to the IRS, and subject to a tax rate based on your income and how long you held the investment.
Trump first broached capital gains tax reform on Tuesday, only to deny it on Wednesday. At one of his impromptu pressers, he told reporters he had the authority to make cuts to the tax on investment income, which disproportionately affects wealthier Americans.
Trump has reportedly discussed tying capital gains to the inflation rate, which would reduce the amount of profit subject to taxation.
“I’ve looked at indexing for a long time; it’s not something I love,” Trump said Wednesday. “I think it’s probably better for the high-income people and I’m not looking to do that. I want to do for the workers. I’m looking to do for the middle income people.”
John Madison, CPA and personal financial counselor at Dayspring Financial Ministry, told CCN that inflation indexing could result in substantial tax savings for Bitcoin investors who sell coins at a profit.
For example, if you buy one Bitcoin today for $10,000 and sell it five years later for $15,000, the $5,000 profit would be considered a long-term capital gain under current law. Inflation indexing could reduce that capital gain to $4,000, resulting in a smaller tax bill.
“When the asset was sold, the cost basis would be increased to $11,000 to account for the effects of inflation over the five years. Then, the capital gain would only be $4,000 ($15,000 less $11,000), reducing the taxpayers capital gain tax liability,” Madison said.
However, Madison also said that you’d need to hold your cryptocurrency for several years for indexing to have any real impact on your capital gains bill.
Given Bitcoin’s volatility, that might not be worth the risk for short-term investors whose coins have already appreciated considerably.
“Realistically, though, with inflation being so low, a taxpayer would need to hold their Bitcoin (or other cryptocurrencies) for a relatively long time to realize any significant tax savings,” Madison said. “For those who are short-term investors, the proposal wouldn’t have a meaningful financial impact.”
But if indexing did increase net profits for long-term cryptocurrency investors, would that make them more likely to cash out?
Sang Lee, CEO and co-founder of Konstellation, told CCN that he wouldn’t be too concerned. Konstellation is the blockchain development division of DarcMatter.
“I do not believe it would have much impact in the short term, as most investors are not considering the tax implications of Bitcoin investments generally as the primary catalyst.”
However, capital gains mitigation typically makes investing more appealing, Lee said. He added that such a move is another reason to include Bitcoin as a diversification tool in your portfolio.
“I actually do not believe people will sell their Bitcoin because of the potential of capital gains savings. If anything, this will continue to incentive #HODLers to #HODL! “
Kevin Johnson, the COO of the digital asset brokerage Tagomi, said that he expects capital gains reforms wouldn’t affect cryptocurrency any differently than other investments.
“The potential tax savings would affect Bitcoin holders in a similar way as other asset classes. Active traders are always seeking clarity on the tax treatment of capital gains in order to accurately calculate their profits/ losses,” Johnson said. “Having some stability would be positive for the trading markets as the crypto markets continue to mature.”