There’s been a lot of speculation of late that the recent weakness in crypto has been largely due to the approaching end of tax years in certain countries.
Is this just more wishful thinking on behalf of weary bulls, clinging to any glimmer of hope?
Or is there actually some substance in this?
Well, if we take an example of stock markets then it’s pretty well known that new money flows into the market after new financial years. Sometimes even quarter to quarter.
For instance in the U.K. April 6th is start of new tax year. On this day investors are free to use up their next tax free allowances for pensions and savings accounts.
Many investors in the U.K. trade from an ISA which you can trade stocks in. Each year you can add up to £20,000 and buy stocks.
Investors can also trade stocks in a pension account called a SIPP (self invested personal pension). Again you can add new funds up to your yearly tax free allowance from April 6th.
In addition to this, if people have been underwater on any investments but they’ve made good profit on other investments for which they are facing a whopping capital gains tax bill, the losses can be offset against those gains to bring down your payment.
But to do that you need to book those losses by selling.
Sometime people sell, book the loss, then buy back for holding in the new tax year.
This can push some stocks down slightly. But they begin to recover when the buying happens in the new tax year.
There’s a similar pattern in the United States. Tax year is 17th April.
Any losses taken on your investments can be booked before that date and offset against gains for tax reduction.
So this time there could actually be some substance behind all this chatter.
In the case of Bitcoin and crypto there will be many investors sitting on heavy losses for the current year.
But the flip side of this is that there will also be a lot of profit to tax from the phenomenal gains that many made from ICOs and Bitcoin.
We would rather not pay anything to the Government right?
Hence a lot of loss booking going on.
It remains to be seen whether the investors booking these losses will return to buy again towards the end of April.
But one thing is for certain, it won’t be long before the crypto world has another theory for why the market is behaving as it is.