All good things eventually come to an end, and unfortunately, that is looking to be the case with Bitcoin. The Biden administration in the USA is continuing its attack against Bitcoin and crypto by moving to possibly eliminate the ability to tax harbor. If you aren’t aware tax harvesting is when you sell your assets at a loss and claim that loss on your tax return this year, or even in the future. It allows you to deduct taxes owed from other capital gains or income.
While this may seem bearish and like the US government is trying to destroy the crypto market. If this does pass through the government, it could have an effect on prices, causing them to drop in the short term. However, it actually isn’t as bad as you might expect. Let me tell you why.
The first thing that you need to know is that you would still be able to claim losses on your taxes by selling your Bitcoin at a lower price point than you initially bought at. The government’s main goal is to eliminate wash trading, which has been prevalent in the crypto industry. Wash trading is when you sell your asset at a loss in order to claim it on your taxes, but immediately after you sell you then instantly rebuy the same asset. This type of transaction is actually already illegal in other financial markets such as stocks and equities. With stocks, after selling you are required to wait 30 days before rebuying in order to claim it on your taxes. What this all means is that Bitcoin will be treated similarly to most other financial assets moving forward. Which to me seems like a good thing. It's also a sign that the market is finally maturing and the general opinion of it is increasing as well.
Wash trading has always been prevalent in the crypto industry due to markets being open 24/7/365. However, in the past one of the deterrents that discouraged people from doing this was fees. In order to do this on exchanges with large amounts of crypto, the fees for buying and selling would result in losing crypto. But this changed last year as well. During the worst of the crypto insolvency summer of 2022, Binance introduced no fees for Bitcoin on their exchange. Now users could perform their wash tried and instantly rebuy for no cost. There was no crypto lost. It turned into a free way to save money, which naturally resulted in people taking advantage of it. If you have been paying attention to price charts, they have been acting differently from how they normally did in the past. Quickly moving down like a rocket, and then soaring back up instantly. Or even remaining in the same price zone for what feels like weeks. Perhaps free wash trading was one of the contributors to this.
Now on to the part that most people will care about. How will this affect the price of Bitcoin?
There is no denying that if this law passes it will be perceived as a bearish thing for the industry and this FUD will cause the price to drop. However, I actually believe it will be good for its price in the long term. Historically wash trading has been a strong downward price force for Bitcoin. Recently, December to March of each year have been known as the months when prices drop due to people selling crypto to either claim a loss on their taxes or help pay for them. With that said, once this new law takes effect it could eliminate a large percentage of this wash trading. Eliminating large amounts of downward price pressure. While there is no guarantee that it will make prices go higher, it could be enough to prevent them from dropping during those periods.
The key point is this. Investors, VCs, and companies have all been clamoring for more regulations to come to the Bitcoin and crypto markets. Being treated similarly to how most other financial assets are treated should have always been expected. We were lucky to have the loophole of wash trading anytime we wished without consequences for the first 14 years of Bitcoin’s existence. But in order for this industry to grow, that loophole will have to be closed. What seems like a bearish thing for Bitcoin might actually end up being bullish for its future.
How about you? Have you ever wash traded with your Bitcoin or crypto?
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