According to a hedge fund manager, cryptocurrency capital gains totaled $1.4 trillion last year.
According to Pantera Capital’s February blockchain letter, some of the recent selling pressure in cryptocurrencies is due to unforeseen tax positions. Tax day, which falls on April 18 this year in the United States, can have an effect on cryptocurrency prices, the report stated.
According to the fund, over $1.4 trillion in bitcoin capital gains were generated last year, and satisfying the accompanying tax bill could have accounted for a “significant portion” of recent sales.
The money manager noted that following past significant runs – in 2013, 2017, and 2020 – bitcoin peaked 35 days before tax day and then plummeted as investors liquidated holdings to cover accumulated taxes. It said that cryptocurrency prices often decline in the run-up to tax day, a pattern that is likely to repeat again this year following 2021’s rise.
“Many cryptocurrency traders are inexperienced investors,” the letter states. “… one might envision someone purchasing as many bitcoins as possible. They then decide to exchange it for ether. Then their tax preparer informs them that they owe 34% of their gains in taxes.
“Because the investor is ‘all-in’ on crypto, the only method to cover the tax obligation is for the investor to sell some bitcoin,” the fund explained.
Due to a paucity of guidelines on anything from staking payouts to non-fungible tokens (NFTs), tax filings involve some degree of guesswork.
Pantera created the first bitcoin fund in the United States in 2013. In the same year, it launched the world’s first blockchain-focused venture capital fund. Dan Morehead launched the firm in 2003. It presently manages $4.6 billion in assets and has invested in 95 ventures.
Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.