U.S. households likely owe $25 billion in capital gains taxes for their cryptocurrency holdings, which could result in "massive" selling of the digital currencies into U.S. dollars by the mid-April tax filing deadline, one Wall Street analyst said.
"This is a massive outflow from crypto to USD and historical estimates are each $1 of USD outflow is $20-$25 impact on crypto market value," Thomas Lee, head of research at Fundstrat Global Advisors, said in a Thursday report. Formerly chief equity strategist at J.P. Morgan Chase, Lee is the only major Wall Street analyst to formally cover bitcoin and other cryptocurrencies.
"Additionally, we believe there is selling pressure by crypto exchanges who are subject to income tax in U.S. jurisdictions," Lee said. "Many exchanges have net income in 2017 [of more than] $1 billion and keep working capital in [bitcoin]/[ethereum], not USD — hence, to meet these tax liabilities, are selling BTC/ETH."
Bitcoin performance over the last 12 months
Source: CoinDesk
Tax-related selling would add to bitcoin's tough start to the year.
The largest cryptocurrency by market capitalization plunged 50 percent in the first quarter due primarily to regulatory uncertainty, analysts said. It has fallen slightly in the first five days of the second quarter to around $6,800, according to CoinDesk's bitcoin price index.
"Regulatory headline risk is still substantial. And sentiment remains awful, as measured by our bitcoin misery index, which is still reading misery," Lee said.
Despite the recent fall in bitcoin's price, U.S. investors may still owe capital gains taxes on cryptocurrencies' tremendous rally last year, resulting in a need to sell. Last year, bitcoin soared more than 13 times in price and hit an all-time high above $19,000 in mid-December. It remains about 450 percent higher over the last 12 months.
The IRS treats "virtual currency" as property, meaning transactions are taxed.
Lee estimates cryptocurrency investors have a tax liability of $25 billion for 2017, based on the historical tendency of U.S. households to realize about 52 percent of capital gains in any single year.
Investors likely realized a record $1.04 trillion in capital gains for cryptocurrencies and stocks in 2017, Lee said. He added the combined figure is the most since reaching $924 million in 2007, just as the financial crisis was getting started and shortly before bitcoin was invented.
However, selling around tax season could abate in less than two weeks.
"Ultimately, we expect bitcoin to find footing after April [17], tax day," Lee said.
Lee still sees bitcoin nearly tripling to $20,000 by the middle of this year, and rising further to $25,000 by year-end. He expects ethereum to quadruple to $1,500 by the middle of the year and ultimately reach $1,900 by the end of the year.