Joe Biden's Plan to Raise Capital Gains Tax Sends Bitcoin Tumbling

News that President Joe Biden will propose a significant increase in the capital gains tax sent Bitcoin's price below $50,000 for the first time since early March.

Bitcoin dropped as low as $47,467.91 in early trading Friday. Bitcoin's market cap fell below $1 trillion. Ethereum, the world's second-most popular cryptocurrency, fell 10.68%. XRP, Stellar and Cardona, also slid into the red.

CoinMarketCap said the decline erased about $200 billion in the entire cryptocurrency market.

Carlos Betancourt BKCoin Capital LP
Carlos Betancourt, founding principal, BKCoin Capital LP, Miami, Florida.

"The proposal would put the effective tax rate at above 50% in certain states and would be detrimental to job creation," Carlos Betancourt, co-founder of BKCoin Capital in Miami, told Newsweek, "and would continue to accelerate the move from states like California and New York to more tax- friendly states like Florida and Texas that have no state income tax."

"Treasury Secretary Janet Yellen has called Bitcoin a 'highly speculative asset" and proposed a capital gains tax as high as 80% for crypto trading. Meanwhile, China continues to move forward with testing its digital yuan and went as far as saying that cryptocurrencies can be treated as 'investment alternatives.'"

Betancourt said the contrast is stark, and may have profound implications for future development of the economy in the United States and China.

"These are two very different stands between the top two economies in the world," he said.

Janet Yellen, Treasury, Coronavirus, Economy
Treasury Secretary Janet Yellen listens during a meeting with President Joe Biden in the Roosevelt Room of the White House on March 5, 2021 in Washington, D.C. Al Drago/Pool/Getty Images

"One is more advanced when it comes to digital assets," he said, "while the other is playing catch up and not understanding how powerful blockchain technologies and cryptocurrencies truly are."

In mid-day trading Friday, Bitcoin changed hands at $49,787.35, a 23.2% drop from its record high of $64,829.14. A drop of 20% or more is considered a bear market.

Nevertheless, the cryptocurrency is up 69.79% for the year, CoinDesk reported.

Biden is expected to propose raising the Federal capital gains tax to 43.4% from the current top rate of 23.8%. That's an increase of 82.35%.

Bloomberg News reported that Biden will propose taxing capital gains for those who earn more than $1 million at the personal income tax rate, which he seeks to increase to 39.6% from 36%.

Including the 3.8% ObamaCare tax on investment, the new rate would be 43.4%.

But that's just the Federal tax rate.

Including California's 13.3% capital gains tax rate and New York's 11.85% hit, plus a 3.88% tax bite in New York City, and the new rate would climb close to 60% in those states.

News of the proposed tax hike dragged the stock market down Thursday.

The Dow Jones Industrial Average, a gauge of 30 major stocks, lost 321.41 points. The S&P 500, a broader index, lost 38.44 points. Nasdaq dropped 131.81 points.

But the stock market returned to positive territory Friday and made up some of the losses by mid-day.

Investors fear that higher taxes will erode returns and dampen interest—especially in a volatile asset like Bitcoin.

It's unclear what a higher capital gains tax might mean for venture capital and the next round of innovation or foreign investment in the U.S.

During the 2020 campaign, U.S. Senator Bernie Sanders of Vermont, an Independent and self-proclaimed socialist, said Biden would be the "most progressive president" since Franklin Delano Roosevelt.

"The reason I say that I think Biden has a chance to be the most progressive president since FDR is that is exactly what Joe Biden said to me," Sanders said in an interview with PBS in July 2020 after he had dropped out of the race for the Democratic Party's presidential nomination.

It's also unclear what long-term effect Biden's proposed increase in the capital gains tax rate might have on the cryptocurrency market.

Prior to Friday's plunge, Bitcoin's value quadrupled in 2020 and jumped more than 100% in 2021.

Institutional investors drove Bitcoin's price higher as many bought and held the cryptocurrency as a bet on future price appreciation and as a hedge against inflation.

Major Wall Street investment banks and Boston-based mutual funds made Bitcoin investments available to their clients.

But the Guardian, a British newspaper, said NatWest Bank will decline to handle business customers who accept payment in Bitcoin or other cryptocurrencies.

"We think of cryptocurrencies as high risk and we're taking, for that reason, a cautious approach to this," Morten Friis, a NatWest board member and head of its risk committee, told shareholders this week during an online meeting. "It's an area where regulation is very much in evolution and we'll obviously respond to that as things change,"

Major companies, including electric carmaker Tesla and office sharing company WeWork, have announced plays to accept Bitcoin.

"This is long-term trouble for Britain—not Bitcoin," Betancourt said. "Any country that decides to go against the general sentiment of the people will be in for a rude awakening. Those who are not doing so will be left behind when it comes to technology and innovation."

In January, the Financial Conduct Authority, a British watchdog agency, told British Bitcoin investors they should be prepared to lose all their money.

Authorities in the United Kingdom, European Union and the United States have expressed concerns that Bitcoin and other cryptocurrencies could be used to launder money to fund illicit activities and terrorism.

On Monday, Bitcoin dropped nearly 20% less than a week after reaching a new high as automatic sell orders kicked in, deepening the downturn.

Analysts attributed the plunge to a power outage in the Xinjiang region of China, where a significant portion of Bitcoin mining takes place. This caused a sudden dip in the global hashrate, which caused transactions to back up.

A "hash" is an alphanumeric code of a set length used in Bitcoin mining, or solving complex problems with computers. If successful, the miner earns a predetermined number of the newly created Bitcoins as reward.

A strong "hash rate" indicates vigorous Bitcoin mining activity and that's needed to maintain the blockchain ledger, an unbreakable record of all transactions in the cryptocurrency.

The one-time event didn't undercut Bitcoin's long-term prospects, analysts said, and the cryptocurrency quickly recovered.

Then came news of Biden's proposed increase in the capital gains tax.

Market Pulse

Limited supply and rising prices slowed existing-home sales for the second straight month, the National Association of Realtors (NAR) reported. Sales fell 3.7% in March from February, the Washington-based trade group said.

However, housing prices have posted 109 consecutive months of year-over-year gains.

'Sale Pending' Sign Outside of Home
A house is seen with a "Sale Pending" sign on it. The Houston Association of Realtors recently decided to remove the term "master" from descriptions of bedrooms and bathrooms on its Multiple Listing Service. David McNew/Getty

"Consumers are facing much higher home prices, rising mortgage rates, and falling affordability," Lawrence Yun, NAR's chief economist, said in a statement. "However, buyers are still actively in the market."

"The sales for March would have been measurably higher had there been more inventory," he said. "Days-on-market are swift, multiple offers are prevalent, and buyer confidence is rising."

Inventory totaled 1.07 million units at the end of March, down 28.2% from a year ago.

Limited supply has led to competitive bidding. In March, houses sold after 18 days on the market—the fastest pace recorded in NAR records.

The median price for all types of existing houses in March was $329,100, up 17.2% from a year ago.

First-time buyers represented 32% of sales in March, up from 31% in February, but down from 34% in March 2020, NAR said.

Individual investors or those buying a second house bought 15% of homes in March, down from 17% in February, but up from 13% in March 2020.

All-cash sales accounted for 23% of all deals in March, up from 22% in February and 19% in March.

On Friday, the average annual percentage rate for a 30-year fixed mortgage was 2.811% and 2.113% for a 15-year fixed rate loan, NerdWallet reported.

The U.S. economy continued to recover from the COVID-19 lockdown.

Initial unemployment claims for the week ended April 17 dropped to a seasonally adjusted 547,000, a decline of 39,000 from the previous week and the lowest since lockdowns began in March 2020, the U.S. Bureau of Labor Statistics reported.

However, the total is more than double the pre-pandemic level.

Retail sales jumped 9.8% in March, exceeding Wall Street's consensus estimate of a 6.1% increase.

The increase was driven by pent-up demand as COVID-19 restrictions were lifted and by the latest round of U.S. government stimulus checks.

Consumer spending represents about two-thirds of the U.S. economy.