Biden’s Tax Plan Shines Spotlight On Bitcoin Borrowing Services

On Thursday, market participants were throttled by news that the Biden administration sought to nearly double the capital gains tax in the United States. Specifically, the proposal would draw a higher percentage from citizens earning more than $1 million.

Capital gains taxes are those that investors pay on the profit made from selling assets. There are both short- and long-term capital gains, with the longer-term tax being much lower. The rules can vary from country to country and state to state.

The current capital gains tax rate for America’s wealthy individuals is 20%. If one throws in the additional 3.8% tax which funds Obamacare, the President’s new plan would bump the new rate to a whopping 43.4%. This hike would be the first of its kind since 1993.

A unique market environment has, however, called for unique solutions. Just as the government has been working hard to curb the economic woes of a pandemic, it now needs to collect on all that money printing. Mati Greenspan of Quantum Economics told Crypto Briefing that:

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“Though some Congressman seem to be warming up to digital assets, the government as a whole seems to be less excited about the gains being made in all risky markets and are now looking to enforce a bigger cut for government programs. Bitcoin was invented exactly for this reason.”

As the proposal has yet to hit the Senate floor, investors quickly scooped up their gains from this cycle’s heady bull run. Cashing in now means locking in the current tax rate, regardless of the proposal’s viability.

In this sense, the selling pressure likely comes from a demographic that does not have a long-term thesis behind their investments. That, or they don’t expect their favorite growth stocks to continue growing.

Bobby Ong , the co-founder and COO of CoinGecko, told Crypto Briefing:

“We might see investors use this opportunity to take profit from the bull market, leading to a larger pullback on crypto. We might also see a narrative change from growth stocks to value stocks. Investors might take this opportunity to take profit from the bull market while technology stocks that have been receiving great fanfare might see some pullback due to the same reasons.”

There are other derivative effects of the tax proposal beyond rotating out of tech stocks and crypto. With higher taxes in the United States, some pundits have said that talent will flow elsewhere.

Ong, however, reminds that “Silicon Valley is still located in the United States,” adding:

“With higher capital gains tax, some capital will probably flow out to other countries but it remains to be seen whether that is a good enough reason for talent to move. Though this might be irrelevant to crypto-investors as the majority of them do not have physical offices and work remotely.”

Biden’s tax plan has sparked discussions not only around long-term bets and talent flight but also one of the oldest trades in finance. Cash-strapped investors not interested in liquidating their assets may use those assets as collateral to take out loans. This move does not activate any additional taxes.

Various lending and borrowing services suddenly look much more interesting. While many users are only interested in the high yields offered by lending assets, few retail investors have thought deeply about borrowing against their holdings. This strategy may soon enjoy more popularity given the latest tax plan.

The managing partner and co-founder of Nexo, Antoni Trenchev , has even suggested that Biden’s plan may even be “a strategic prelude to pro-crypto legislation in the U.S.”

Nexo lets qualified users put up collateral on 18 different cryptocurrencies and earn a direct line of credit linked to their bank. With over $12 billion in assets under management, Trenchev said that Biden’s proposal might boost that figure “should his proposal to raise taxes for wealthy investors go through.”

A variety of decentralized options leverage the same strategy. Ong said:

“Several DeFi lending protocols have seen great adoption such as MakerDao, Compound, and Aave. A new-comer, Alchemix has made a splash recently by introducing self-payable loans without the risk of getting liquidated. I do foresee more DeFi users being more comfortable with taking loans, and now with the high capital gain tax, there are even more reasons to use it.“

On the night of Apr. 17, the crypto market witnessed an intense crash taking out $10 billion in liquidations. Bitcoin dropped 14% to lows around $51,000 as altcoins took a deeper dive.

Despite the relief rally to $55,000 earlier last week, Bitcoin’s price failed to overcome resistance from the 50-day moving average.

The price dropped again to lows of $47,500 late Thursday following Biden’s plans to increase the capital gains tax. Weekly expiration of options contracts could have also influenced Friday's drop.

Nonetheless, the price was edging close to the exit price of traders betting on higher prices.

Short-term traders will be looking for support from the 128-day moving average at $45,000. A breakdown below the 200-day moving average at $35,000 threatens to end the long-term bullish trend.