As US Tax Day looms, and there’s a theory that it could cause a major (and largely unintended) sell-off into the market.
The joyous event falls on April 18 this year.
So, let’s look at what happened in previous years leading up to Tax Day, and anticipate what could be in store.
Let’s dive in.
TL;DR:
- US Tax Day usually brings selling pressure with it.
- Taxes due on US$1.4 trillion from 2021.
- Sell-off could be imminent.
In the build-up to (and including) Tax Day, many of the traders and investors that farmed the markets, sold high, bought low, reinvesting all their gains back into the market in order to yield even more gains, suddenly receive a call from their accountant.
“You have to sell your positions to pay your tax bill!”
No one wants to hear this. But it’s a fact of life. Taxes, and death. As far as crypto is concerned, every token sale at a profit creates a taxable gain.
In 2021, there were US$1.4 trillion of crypto capital gains created. When all this capital is put through the collective accountants’ calculator, it returns a large figure owed to the tax authorities.
A figure that is taken out of the crypto markets.
As seen in Pantera Capital’s Blockchain Letter from February 16, 2022 titled “The Next Mega-Trade”, Tax Days create small cycles of selling and buying pressure.
After the previous big run-up of 2020, bitcoin peaked 35 days before 2021’s Tax Day, declining to a local trough (the stage of a market cycle that marks the end of decline and a transition to expansion), as investors sold off assets to cover taxes accrued in the 2020-2021 fiscal year.
We can see similar happenings leading up to Tax Day in the previous years as well. On average, the peak of the market came 113 days prior to Tax Day, and the trough came 13 days after.
Source: https://panteracapital.com/blockchain-letter/the-next-mega-trade/
Experienced investors tend to hold off from deploying their entire capital into investments, keeping a percentage of their portfolio in cash.
So, the majority of the sell-offs may very well be from first-time crypto investors who have gone all in, with no capital on the sidelines. As a result, come Tax Day, they have no option but to sell their crypto.
Plus, according to this article from CNBC, only 25% of crypto investors in the US are actually ready to file!
However, this might not be such a disaster. Because you can bet that the big players (the whales, institutions, and serious crypto investors) are ready to file, and have probably done so already.
Banter’s take
With 10 days approaching, don’t be surprised to see some downside. If so, you’ll know one of the potential contributing factors. But the downside is that will likely be bought up quickly. Have you done your taxes? Do you have cash sidelined to cover them? Just imagine this: a flash dip, but you can’t deploy, because the money is safeguarded for the taxman. It’s the stuff of nightmares!
