On December 22, President Trump signed his tax reform plan into law. The Tax Cuts and Jobs Act passed Congress with a vote of 51 to 48 in the Senate and 224 to 201 in the House. It’s the most sweeping tax overhaul in 30 years. So, how will cryptocurrencies fare under the new plan? Pretty well, as it turns out. Here’s why Bitcoin investors stand to benefit from Trump tax reform.
About the Bill
The new tax plan:
- Cuts personal income tax rates by several percentage points across tax brackets.
- Nearly doubles the standard deduction for all filers.
- Suspends the personal exemption (currently $4,150)
- Ends the individual mandate of the Affordability Care Act, removing the tax penalty for uninsured individuals.
- Massively cuts corporate tax rates from 35% to 21%
- Suspends or limits most itemized deductions.
Some of these changes, like the tax cuts and doubling of the standard deduction, will expire in 2025. That’s enough time for the federal government to lose out on a big chunk of revenue. The tax plan is expected to raise the federal deficit by about $1.46 trillion, according to some estimates – and, if the cuts are not allowed to expire, that figure will rise.
With the national debt already hovering around 20 trillion, an increase may not seem like good news. For Bitcoin investors, however, a higher debt delivers some unexpected benefits.
Weaker Dollar, Stronger Bitcoin
The national debt impacts the value of the dollar. With a higher debt and an unbalanced budget, the U.S. Government must borrow at a higher interest rate to make payments. As interest rates increase, confidence drops – and so does the dollar’s value. Trump’s tax reform, with its massive debt increase, could make the dollar plunge over the next decade.
Investors once sought relief from a fluctuating dollar by investing in uncorrelated assets or assets like gold, which are inversely correlated with the dollar’s value. Today, there’s a new option: Bitcoin, which is uncorrelated with any asset and offers superior performance.
Chris Burniske of ARK Investment Management points out that Bitcoin constitutes a new asset class that’s uniquely able to stabilize a portfolio in an era of volatile returns. As the tax plan drives investors towards Bitcoin as a hedge against a falling dollar, the value of Bitcoin will rise.
The stock market may also see some pullback heading into 2019. Although cutting the corporate tax rate from 35% to 21% will boost stocks in the short term, slowing growth and the increasing weight of national debt on the GDP will eventually show up as negative returns in the market. In the long term, investors will seek uncorrelated assets that offer better value, with cryptocurrencies and Bitcoin as the leading options.
Extra Money Flows to Cryptocurrencies
There’s a flip side to the national debt increase that leads to a win-win scenario for Bitcoin. Even as Trump’s tax cuts drag down federal budgets, more money flows into the pockets of certain individuals, and – especially – to corporations. These entities won’t just have a greater incentive to invest in cryptocurrencies, they’ll have greater means to do so. Blockchain adoption could surge as a result.
Companies are already integrating blockchain into their operations. Fintech firm R3’s open-source Corda network is being used by over 60 companies, including Intel and Microsoft. Goldman Sachs and Google are investing in the technology. Public interest is high: when Long Island Iced Tea Corp. rebranded as Long Blockchain Corp. in December, its share price rose 289 percent. Lower corporate taxes let companies devote more funds to blockchain integration, bringing the technology into the mainstream.
Mainstream adoption means more opportunities for Bitcoin investors. The list of businesses that accept Bitcoin as payment is large and rapidly growing. CME’s recent launch of Bitcoin futures, along with Bitcoin ETFs and IRAs, make it possible to use Bitcoin in a variety of ways. Trump’s tax reform makes it possible for individuals to invest more in Bitcoin and use these investments more effectively.
Cryptocurrency Tax Fairness Act: The Next Step?
In September, Rep. Jared Polis and Rep. David Schweikert introduced the Cryptocurrency Tax Fairness Act as an amendment to the tax reform bill. The idea was to create a tax structure for cryptocurrencies, so that consumers could make purchases up to $600 without having to report them. Lifting reporting requirements would incentivize the use of cryptocurrencies on an everyday level.
The Act was not adopted into the tax bill, but remains an open issue. Some fear it would lead to over-regulation, while others see it as a necessary step towards legitimizing cryptocurrency. Either way, the Cryptocurrency Tax Fairness Act shows that legislature takes cryptocurrency seriously and is ready to push for a workable model. We can expect to see more discussion and better solutions over the next few years.
In 2017, Bitcoin prices soared and blockchain adoption exploded across industries. Trump’s tax reform sets an even better stage. Rising debt will increase Bitcoin’s value as investors move away from the dollar to a safer, uncorrelated asset. Lower corporate and individual taxes will lead to increased spending power and greater blockchain adoption. The Cryptocurrency Tax Act and similar bills will improve public awareness. This decade should be exciting for Bitcoin, with plenty of new opportunities for investors.