Long-term Cap Gains Tax Selling | 2024 Bitcoin Blueprint
Long-term Capital Gains Tax Thesis | Published April 29
The United States, along with many other countries, have lower tax rates on capital gains if you hold for over 1 year. In the US, the long-term capital gains tax rate is 0% (on the first $47k of profit) as compared to short-term capital gains which are taxed at your individual income tax bracket (for many individuals this can be well over 30% as it stacks on top of your income).
This incentivizes people to hold an asset for at least 1 year before selling.
This incentive grows stronger the closer someone is to the 1 year mark. For example, if you bought 1 BTC for $25k each on the 15th of June, 2023, you are now only ~45 days away from being able to sell it and pay significantly less in taxes.
If you were to sell it for $65k, your net profit is ($65k - $25k = $40k).
That $40k is taxed as short-term capital gains at let’s say roughly 24% (assuming you’re single making ~$95k/yr in income), meaning you only get to keep ~$30k.
If you’re willing to wait another 45 days for long-term capital gains to kick in, and BTC is still trading at the same price, you pay 15% in taxes based on a normal income over ~$47k.
This means you keep $34k instead of $30k. As you get to higher tax brackets and larger investors, these long-term capital gains tax incentives become larger. Some of the largest tax brackets would be paying a 20% long-term tax rate vs 37%+ on short-term capital gains.
This is a very strong incentive that directly influences the timing of buying and selling behavior in the market.
Therefore, if we are able to identify large pockets of buying behavior, we should be able to predict large pockets of selling behavior exactly 1 year later.
We’ve done exactly that. Here’s how last market cycle would have mapped out according to this theory:
Green = historical buying zones (new buyers entering the market that will be incentivized to sell 365 days later after LT cap gains kicks in)
Red = Predicted periods of high cap gains selling based on being 365 days from green zones (bearish)
Blue = Low volume, low volatility cooldown periods (no new buyers entering, should result in bullish periods 365 days later)
Purple = Predicted periods of low cap gains selling based on being 365 days from blue low volume, low volatility zones (bullish)
Vertical Lines (Vol) = volume spikes. Vol spikes indicated in red zones are predictive based on large buying 365 days prior, beware of local tops forming around these times.
Numbers = number of days the zone spans
Bottom Pane = Spot volume by exchange
As you can see, there is a lot of selling that takes place 1 year after large occurrences of buying. It is particularly apparent as local tops tend to form 365 days after large volume spikes. Large amounts of spot buying volume equates to many people at the same time holding off on selling until they qualify for long-term cap gains. This lack of selling leading up to the 365 day mark allows the price to rise in absence of sellers, then subsequently pull back as many sellers enter the market at once.
Obviously, this analysis is only relevant if price is significantly higher 1 year after large buying spikes. If price is the same or lower than it was a year prior, the incentive to qualify for long-term cap gains tax is minimized or absent.
This market cycle’s map can be seen below:
As you can see, the first two major buying frenzies of this cycle (Green 28 and 36) have directly corresponded to selloffs 1 year later (Red 28 and 35).
The first blue cooldown period (Blue 22) corresponded to our most aggressive price mark-up of the cycle (Purple 22) as there was a general lack of long-term cap gains sellers for that span of time on the back of strong BTC ETF inflows.
Note that we are currently entering a long period (Purple 184) where there was very few new buyers and very low volume in the period 1 year prior (Blue 184 with the exception of one pump in June (Green 8)).
This should hypothetically mean that there will be very little sell pressure from those seeking to wait for long-term capital gains. This also hypothetically means that the largest upside should be seen toward the tail-end of (purple 184) as many buyers in the (Green 51) cohort opt to hold until (Red 51) in October to achieve long-term cap gains tax rates.
Note that massive buy volume came in from January 23rd to March 13th of 2024 (Green 50 💀).
This buy volume corresponds to the same timeframe in Q1 of 2025 and would indicate that if BTC’s price is significantly higher than ~$50k at that time, we should expect an aggressive sell off.
Fractals
In theory, we can break down these selling incentives into more granular trends. This is easily done by taking a fractal of the price action from 2023, flipping it upside down, and overlaying it with 2024:
Keep in mind this is on a logarithmic scale and we have flipped the fractal upside down, so the magnitude of the fractal doesn’t matter here, just the direction.
We can clearly see that the mirrored 2023 fractal accurately predicted the downside in (Red 28) and (Red 35).
It also predicted the upside in (Purple 22). Now it is predicting upside in (Purple 184) with downside during (Red 8) and (Red 51).
Caveats
Keep in mind this analysis is simply isolating for a very specific tax-related behavior incentive. There are hundreds of other variables that affect BTC’s price. This does, however, seem to help us identify periods during which BTC’s price is more vulnerable to downside due to large tax related selling incentives. It also helps us identify periods of time where there is high incentive for people to hold instead of sell, which may result in positive price action for BTC.
This analysis is also based on tax laws in the US, while BTC is a global market. That said, the US is the largest market for BTC, and with the introduction of the BTC spot ETFs, this type of analysis likely becomes more relevant. Also, many other countries do have similar long term tax laws with 1 year cliffs.
This analysis does seem to be a helpful tool for rooting bullish/bearish biases over certain timeframes in conjunction with other analysis. For example, BTC usually sees significant upside in the 6 - 12 months following a halving, so we’d already be fairly bullish on crypto for the next 6 months anyways. With our tax incentive analysis, we add another layer of confluence to this timeframe, further strengthening our bullish thesis for the next 6 months or so.
Predictions
Based on this analysis along with a basic understanding of the macro environment and 4 year crypto market cycles, we can put together a rough outline for when we think the crypto market may top.
Two scenarios stand out as being the most likely.
- A top in late 2024 (Red 51) followed by distribution and a larger selloff (lower high) in Q1 of 2025.
- A pullback in late 2024, followed by a market top in Q1 of 2025 (Red 50 💀).