President Joe Biden recently proposed introducing the highest capital gains tax rate in more than a century. With a new top marginal rate of 44.6%, the bold move is aimed toward the richest Americans, but it also applies to dividends, stocks, and cryptocurrency. Today’s article will shed light on the consequences the Biden capital gains tax will have for crypto investors.
What does Biden’s proposal mean?
Biden’s proposal for the Fiscal Year 2025 Revenue of the U.S. budget suggests raising capital gains rates. The news is abuzz with the 44.6% rate, which would be the highest since capital gains rates were introduced. Coupled with individual state capital taxes, the number can go above 50% in some states.
However, things are not that simple. The first proposal is to increase the top ordinary rate to 39.6%, and an additional proposal would raise the net investment income tax by 1.2% above $400,000. The combined effect of the two separate proposals would reach 44.6%.
For context, the main proposal is to raise capital gains tax to 37% for individuals with taxable income exceeding $1 million. The 44.6% rate would come into effect only for individuals with both taxable income above $1 million and investment income above $400,000.
In short, yes, the new Biden capital tax gains proposal would increase the rates. However, the increase is not as cataclysmic to most taxpayers as most headlines suggest.
Will crypto investors pay a 44.6% capital tax rate?
In short, the vast majority of crypto investors won’t.
Let’s clarify this.
First, as of now, the increased Biden capital gains rate is just a proposal. In fact, it is a combination of two proposals that could reach 44.6% only if both are passed into law.
Second, the proposed rate would only affect individuals with a net income of more than $1 million. For comparison, in 2023, the average crypto trader in the world had an annual income of $25,000, and the average U.S. crypto trader made $96,774 as of April 22, 2024.
Matthew Walrath, founder of Crypto Tax Made Easy, said:
“Really high-income earners could potentially — if this budget proposal goes through — face a much higher long-term capital gains tax rate. But for the most part, it’s unlikely that it’s going to affect the average crypto user.”
Do crypto investors pay the 25% tax on unrealized gains?
As part of its tax proposals, Biden has also called for a 25% tax on unrealized gains to a massive backlash from Republicans and vocal opposition. Do crypto traders have to pay it?
For the tax to kick in, crypto traders would need to have over $100 million in net assets, as that is the requirement the proposal poses for individuals to be eligible for the new unrealized gains tax.
In other words, you would virtually need to be a crypto billionaire for this tax to affect your digital assets investments.
Does Biden capital gains tax change anything for crypto?
If you are investing in or trading crypto, you won’t be entirely unaffected.
The 2025 budget proposes removing a special tax subsidy for cryptocurrency trades and other digital transactions. As it currently stands, different rules apply to crypto investors than to stocks and securities. Some even allowed a loophole by which individuals could report excessive losses, claim a significant tax deduction, and proceed to repurchase the same token right after the deduction went through.
The new proposal aims to eliminate tax subsidies for crypto and update the tax code’s rules to prevent further abuse and treat cryptocurrencies like stocks and other securities. The IRS will also require tracking specific crypto transactions by having crypto brokers file out Form 1099-DA, similar to what stock investors have to file for their financial assets. Notably, the form would collect trader identification from brokers, such as date acquired or sold, proceeds, cost basis, and wallet addresses.
This may be a step towards increased federal control of cryptocurrency and digital assets, potentially changing how we understand “decentralized finance.”
What does Biden’s capital gains tax mean for crypto investors? – the bottom line
Considering the narrow scope of the new Biden capital gains tax proposal, its effects will be limited to the richest individuals. Even then, to trigger the infamous 44.6%, you would need to have both over $1 million in annual tax income and $400,000 in investment income. Unless you are Vitalik Buterin, this is unlikely to affect the average crypto investor significantly.
However, the removal of crypto tax subsidies and a new form brokers will have to fill out for each transaction will significantly impact cryptocurrency in the United States, as the Fed will perhaps require more data than you would feel comfortable sharing.
Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk.
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