Bitcoin ‘Underperforms’ During Tax Time: Analysis

Bitcoin's price is going down for many reasons including traders who realized gains last year selling to pay their tax bills.

AccessTimeIconJan 27, 2021 at 9:42 p.m. UTC
Updated Sep 14, 2021 at 11:02 a.m. UTC
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January ushers in a new tax season. It is also, historically, a time when bitcoin underperforms relative to the other months of the year. Some analysts say that may not be a coincidence.

From 2014 to 2020, bitcoin was down in four out of seven Januarys and six out of the past seven Marchs. According to Delphi Digital, average losses for those months were 5.24% and 12.59%, respectively. 

“As we enter tax season, [a period when] bitcoin has historically underperformed other months, this by no means is predictive on a stand-alone basis but important to note,” Paul Burlage, analyst at Delphi Digital, told CoinDesk.

At the press time, bitcoin’s price was at $31,571.54, down 1.22% in the past 24 hours. The No. 1 cryptocurrency by market cap fell below $30,000 briefly earlier Wednesday, according to the CoinDesk BPI.

According to Delphi Digital’s January bitcoin outlook report, one of the biggest reasons for the drop is that “those [investors and traders] who realized significant gains trading various crypto assets last year will likely have to sell at least a portion of their holdings to cover expected tax liabilities.”

Data compiled by Delphi Digital shows that bitcoin/usd pair returns in January and March since 2014 have been predominantly in red.
Data compiled by Delphi Digital shows that bitcoin/usd pair returns in January and March since 2014 have been predominantly in red.

"It’s difficult to pinpoint exactly how much selling pressure can be expected, and different jurisdictions treat capital gains more favorably than others," Kevin Kelly, co-founder and head of global macro at Delphi Digital, said. "But bitcoin alone added more than $400 billion to its total market value last year. A decent portion of those returns accrued to speculators and traders who may have already realized some gains or rolled profits into other corners of the crypto market, thus triggering taxable events."

The Internal Revenue Service (IRS) released updated instructions with on answers to virtual currency-related questions during taxpayers’ tax filing at the end of December. Compared with 2019, 2020’s tax form places a yes-or-no question (“At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”) right on the first page, one of the first questions asked

IRS guidance also further clarifies that transactions involving “virtual currency” will include “purchase of virtual currency.”

Future taxing of unrealized gains?

In recent days, there has been market chatter around Treasury Secretary Janet Yellen’s proposal on taxing unrealized capital gains. Such a proposal would have a broader impact on crypto-related gains.

John Todaro, director of institutional research at TradeBlock, told CoinDesk last week that tax proposals on unrealized capital gains would impose a degree of impact on investors on almost every asset. Cryptocurrency analytics firm TradeBlock is a subsidiary of CoinDesk. 

The Biden Administration’s tax proposal also has some points that might affect crypto investors. One of the proposals, for example, includes collecting taxes of “long-term capital gains and qualified dividends at the ordinary income tax rate of 39.6% on income above $1 million,” which could impact larger crypto investors.

Bradley Keoun contributed to this report.


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