Although cryptocurrencies such as Bitcoin are hyped as operating independently of many external market influences, recent trends suggest that inflation, Federal Reserve policy, and tax season are linked to crypto performance.
Pressure to sell Bitcoin ahead of the April 18 IRS tax deadline, most likely among short-term traders with large holdings, has been blamed in part for the latest Bitcoin price drop below $39,000.
The No. 1 cryptocurrency by market value fell to $38,577 on April 18, a one-month low, according to CoinDesk data. Bitcoin is trading at $42,892.05 as of this writing.
April 18 was the deadline for U.S. taxpayers to submit 2021 tax returns or file an extension. In 2021, market players sold cryptocurrency during the tax season, between Jan. 1 and April 15, Coinbase’s David Duong said.
Top cryptocurrencies like Bitcoin may be more susceptible to external market froces than some crypto enthusiasts would like to believe.
“Tax-related selling has definitely played a role in recent weeks,” Jeff Anderson, CIO at the quantitative trading firm and liquidity provider Folkvang Trading, said in a Telegram chat. “However, it’s difficult to say exactly how much of the weakness has been due to the impending tax deadline.”
The first question U.S. taxpayers see on their 1040 forms asks if “at any time during 2021, did [they] receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency.”
“If you just bought it and didn’t sell anything, you can actually answer ‘no’ to that question because you do not have any taxable gains or losses to report,” said Austin Woodward, a certified public accountant and CEO of crypto accounting platform TaxBit.
But if you bought and sold cryptocurrency, or spent your crypto or exchanged it for other crypto, you must answer “yes” to the question.
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That’s because under U.S. tax law, Bitcoin and other cryptocurrencies are considered property and subject to capital gains taxes, meaning that you owe taxes on value you gained on your property since buying it. But you only owe taxes when those gains are realized, CNBC reported.
Tax-related selling ahead of the tax deadline seems to have aggravated macro-driven weakness in the Bitcoin market, Omkar Godbole reported for Coindesk. The price of Bitcoin declined by more than 17 percent after testing above $48,000 three weeks earlier.
Bitcoin’s growing correlation to stocks could be the more dominant reason behind the dip below $40,000, according to George Liu, head of derivatives at Babel Finance.
“The tax issue has been known and anticipated in the markets already, so we don’t see that as a decisive factor for the current price dip,” Liu said. “Basically, the short-term correlation between bitcoin and U.S. stocks has reached a new peak.”
While Bitcoin has moved above and below $40,000 for most of 2022 so far, the latest price drop is a reminder that decentralized digital tokens may still react strongly to factors such as inflation, taxes, and broader market performance.