Historically, Bitcoin has tended to underperform during the U.S. tax season as traders sell assets to pay tax bills
A new analysis by CoinDesk found that Bitcoin (BTC) has historically underperformed during the tax season. The study suggests this pattern is driven in part by traders who realized gains in the prior year selling portions of their BTC holdings to cover tax liabilities.
Tax season typically gains momentum in January, and the leading cryptocurrency has often lagged during that month. According to the analysis, between 2014 and 2020 Bitcoin significantly underperformed in four of seven Januaries and recorded losses in six of seven March periods over the same span.
Some analysts argue the underperformance during these months is not coincidental. Research from Delphi Digital indicates the average January decline for BTC is approximately 5.24%, while average losses in March are larger, around 12.59%.
Paul Burlage, an analyst at Delphi Digital, said that although tax season is not the sole cause of Bitcoin’s weaker performance in these periods, it is an important factor to recognize. Bitcoin has struggled to hold gains after earlier reaching a record high near $42,000 this year. It briefly dipped below $30,000 yesterday and is currently trading around $31,500 per coin. Despite the recent pullback, Bitcoin remains up roughly 400% over the past year.
The Delphi Digital Bitcoin outlook report for January identified the primary reason for the seasonal weakness as traders who realized gains in the prior year selling some coins to satisfy tax obligations.
Kevin Kelly, co-founder of Delphi Digital, noted it is difficult to predict how much selling pressure Bitcoin will face each tax season because tax treatment of capital gains varies across jurisdictions.
Kelly added that Bitcoin’s market capitalization rose by more than $400 billion last year. A portion of those gains belong to traders and speculators who may have realized profits or rotated capital into other crypto sectors, creating taxable events.
Currently, most tax systems target realized gains, but that could change. Recent reports suggest Janet Yellen, U.S. President Joe Biden’s nominee for Treasury Secretary, has considered proposals that would tax unrealized capital gains as well.