- The crypto market has been losing steam since the end of February.
- The overall crypto market capitalization has lost nearly 15% since the beginning of March 2023.
- The crypto market has seen one of the biggest one-day crashes in 2023 post the Biden administration crypto tax announcements.
Biden administration’s crypto-tax overhaul in the US
The month of March 2023 has brought with it yet another bout of bearishness across the crypto market. The overall crypto market capitalization had been falling ever since the beginning of this month and with the latest update from the White House, it has seen one of the biggest crashes in 2023. The crypto markets have turned bearish, witnessing a crash of nearly 7% in the past 24 hours, as of writing, post the Budget proposal announcements by the US President, Joe Biden.
The overall crypto market cap, which had managed to sustain above the $1 trillion mark for most of 2023 has now broken down significantly below that level and is currently at about $900 billion as of writing this article. So what’s all the fuss about?
US President Joe Biden’s Budget speech
Let’s first take a brief look at all the crypto-centric announcements that have been made by the Biden administration on Thursday, 9 March 2023. There have been two major developments coming in from the biggest crypto market in the world, the United States, and hence these kinds of announcements are bound to affect the crypto market as a whole.
- The first major announcement has been the 30% excise tax on electricity consumption by crypto mining companies and their facilities in the nation. This is a decision backed by the US Treasury Department to curb the electricity consumption by these crypto mining facilities, and even took cognizance of that fact, according to the department’s “Greenbook“.
- Secondly, the Biden administration also took measures to act against wash trading practices and subsequently plug the loophole in the US tax code that would block crypto investors from harvesting their tax losses by selling digital assets at a loss, marking that hit when they file their taxes and then immediately buying the same crypto assets again. This is a tax strategy that has been used by crypto traders in the US, known as “tax-loss harvesting”.
Let’s understand these two new developments in some more detail.
Additional Read: Crypto Tax in India
US Treasury Department Proposes 30% Excise Tax on Crypto Mining Firms
The US Treasury Department has proposed a 30% excise tax on the cost of powering crypto mining facilities in the nation. According to the department’s “Greenbook” – the proposal states the creation of a phase-in excise tax based on the cost of the electricity used in crypto mining and is to be imposed on the companies “using computing resources” to mine crypto assets on the blockchain.
According to the proposal, the companies would also be required to report how many units of electricity they use to this end and what type of power was tapped into. The tax would be phased in over the next three years, increasing by 10% each year. According to a report by CoinDesk, the provision explicitly makes the case that this type of tax may lower the overall number of mining machines in the United States. According to the document:
“The increase in energy consumption attributable to the growth of digital asset mining has negative environmental effects and can have environmental justice implications as well as increase energy prices for those that share an electricity grid with digital asset miners ….. Digital asset mining also creates uncertainty and risks to local utilities and communities, as mining activity is highly variable and highly mobile. An excise tax on electricity usage by digital asset miners could reduce mining activity along with its associated environmental impacts and other harms.”
This, however, still is in the proposal stage and the House of Representatives and the Senate will still have to pass a budget that includes these types of revenue-generating tax rules before they can actually be implemented into the tax code.
Read more: 30% Tax on Crypto Mining Firms Proposed by Biden
Plugging the crypto “tax-loss harvesting” loophole
At present, crypto investors can sell any crypto assets at a loss, claim that loss on their taxes, and then buy the same amount and type of that crypto again. This is something that is known as “tax-loss harvesting” in the crypto trading community in the United States.
To plug this loophole effectively, this provision would be expected to raise up to $24 billion in tax-based revenues for the government, according to a report by the Wall Street Journal. Thus the Biden administration is looking to raise tax-based revenues for the government in the coming years as President Biden is set to go into election later in 2024.
Why is the Biden Administration doing this?
It is imperative to understand why the Biden administration is undertaking such extensive efforts in the overall taxation as a whole. While we have simply looked at the crypto side of things, the new 2024 budget plan isn’t actually against cryptos as such but rather a means to improve the United States tax deficit by creating newer and more tax revenue generation routes. The crypto asset industry happens to be one of many that have been zeroed on to be utilized to generate more revenue for the US government.
Among others, President Biden is also attempting to increase taxes on the rich in the country, by raising the capital gains taxes and also imposing a 4% tax, up from 1% on stock buybacks. According to a White House official document on the 20204 Budget plan, these series of moves will help the government cut the deficits over the coming decade by $3 trillion. This will be achieved through an array of business tax hikes and government spending cuts, despite a higher-than-expected defense budget of $835 billion.
Thus, while this has had a negative impact on the crypto industry, it must also be noted that it is a step to actually bring the industry under a regulatory purview that could, in the longer term improve growth prospects for the industry as a whole.
So how has this move impacted the crypto market?
Total Crypto Market Cap | Source: TradingView
So overall, we can observe from the chart above that the month of March 2023 has been a tough one, especially after a massive rally that was witnessed in the crypto market ever since the beginning of 2023. Since 1 January, we saw an impressive rally of over 40% in a matter of six to seven weeks, going from below $760 billion at the beginning of the year to nearly $1.08 trillion at its highest. But since the beginning of March, the overall crypto market cap has receded nearly 15% and has fallen back down from $1 trillion levels down to sub $900 billion.
Crypto assets of all shapes and sizes have taken a hit in this recent crash, especially the king coin, Bitcoin, which has fallen down below the $20,000 mark once again for the first time in about two months! All major cryptos have seen losses across the board and it is yet to be seen how the crypto market begins to recover from this predicament.
Values as on 10 March 2023.
Read more: Bitcoin Price Prediction