Crypto and the Fed - Why Legislate It When You Can Tax It?

May 17, 2021

Cryptocurrencies have been a hot topic around the water cooler the past few months.  We did a deep dive into crypto and Bitcoin a few months ago here (Bitcoin Part I) and here (Bitcoin Part II) but we find the 24-hour new cycle (and trading) around Bitcoin a fascinating look into what “experts” say will either be the new global currency or the next tulip-mania.  We feel the truth, as usual, lies somewhere in-between.


The US government controls Bitcoin by controlling the exchanges where Bitcoin is bought and sold.  Miners, who earn Bitcoin by solving equations/verifying the blockchain ledger, are outside the exchanges until they sell their Bitcoin for cash (or other crypto) on the exchanges.  In the US, gains from selling cryptos are taxed at the capital gains rates.  However, since the crypto market is open 24/7/365 and it is so volatile; most realized gains are short term capital gains and taxed at the individual’s income tax rate.  I have not been able to find any data on how much the US Treasury has collected from cryptocurrency trading, but the market cap of all crypto is over $2 trillion from a starting value of essentially zero.  It is not likely that the IRS is willing to leave over $40,000,000,000 on the table ($2 trillion x 20% LTCG), especially under the Biden administration’s guidance for a more active IRS.  So, for the time being, why would the Federal Government legislate something that they can tax?  When the true pain starts, either by the US dollar coming under attack or more likely investors getting “hurt” (despite all the warnings about speculation), look for the US Government to act.


 Another item we have been tracking is the enormous energy costs it takes to mine crypto’s  (we’ve been planning on writing about this for several weeks, Elon Musk tipped our hand).  The vast majority of crypto-miners are in China.  The miners use a vast amount of energy.  Coal provides a vast percentage of China’s energy.  So it is irrefutable that mining cryptocurrencies is bad for the environment.  Again, this is not necessarily something the Biden administration will address now, but rest assured they will use this when they need to negotiate (trade bribes) for their New Green Deal.


Speaking of Elon Musk, this will not be there first time he has made a thinly veiled attempt to manipulate the markets.  Don’t be surprised if you find that he, Tesla, or someone close to either has made a big crypto buy after driving the markets down.  Throw in the social media frenzy from the Gamestop manipulation from the Reddit Wallstreetbets, too much down-time on people’s hands due to the virus, and tons of cash in the system - and there has been a lot of market manipulation going on.  Keep an eye out for this - once we’ve hit the other side of COVID (and we’re very close) expect a LOT of legislation.


Will Bitcoin become the currency of drug traffickers, terrorists, and other nefarious actors?  Probably.  At some point, governments are not going to be happy with one or all aspects of Bitcoin and other cryptos:  not enough tax revenues, too much speculation hurting small investors, not green enough, or uncomfortable fiat currency competition.