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A tax on the ultra-wealthy could nudge them towards crypto in certain respects, but hiding assets is not one of them.
A fair tax on the ultra-wealthy has long been a talking point for many US Democrats, but such a scheme would have been impossible under a Republican presidency and a fragmented Congress.
The proposal is officially on the agenda now that the Democratic Party has retaken control of both the White House and Capitol Hill: On March 1, a coalition of Democratic lawmakers led by Sen. Elizabeth Warren proposed legislation proposing an annual levy on households and trusts of more than $50 million in properties, including real estate and securities.
As new bridges between conventional capital and the digital asset space appear almost constantly, high-net-worth individuals can transfer value to cryptocurrency with greater ease than ever before. Will a potential inheritance tax, if enacted, influence their ability to do so?
Senator Warren’s bill, dubbed “The Ultra-Millionaire Levy,” imposes a 2% annual tax on every household’s nett worth between $50 million and $1 billion, and a 3% tax on those worth more than $1 billion. The framers argue that the burden would only fall on the nation’s richest 100,000 families, or the top 0.05 percent of the income distribution.
The legislators claim that the plan will generate at least $3 trillion in federal funding over the next ten years, which will be used to finance underfunded sectors such as schooling, healthcare, and infrastructure.
Before it may become law, the draught statute must be approved by the United States Senate. Despite the fact that Democrats and Republicans are actually tied 50-50 in the house, with Democratic Vice President Kamala Harris casting the decisive vote, most bills require at least 60 votes to pass. According to Bloomberg, Democrats are planning to attach certain aspects of the tax to the spending bill that will be reconciled later this year.
It doesn’t come as unexpected that the initiative received immediate scolding from the political right and center, along with big business circles. In the weeks after the proposal went public, the Wall Street Journal ran several op-eds unpacking the reasons why the wealth tax would bring more harm than good.
One argued that a wealth tax for American millionaires and billionaires would affect the ownership landscape in the U.S. stock market: As big U.S. investors would be pressured to sell their most liquid assets at a discount, their counterparts from wealth tax-free jurisdictions would be happy to buy in. The author of another contended that the outflow of capital from the stock market resulting from taxation of the ultra-wealthy would diminish the value of everyone’s savings.
Billionaire Leon Cooperman told CNBC that while he believes that rich people should pay more taxes, Warren’s configuration of the policy “has no merit.” He added: “If the wealth tax passes, go out and buy yourself some gold because people are going to rush to find ways of hiding their wealth.”
Wait, but could that gold be digital?
Not a place to hide
Granted, Cooperman’s remark on using gold to conceal one’s nett worth is a metaphor for the types of investments that are less transparent to the government than those in bank and investment accounts. In terms of gold itself, the IRS deems precious metals to be collectibles subject to long-term capital gains tax. Cryptocurrencies may not fit under any of these definitions since they are neither collectibles (unless they are nonfungible tokens) nor less noticeable.
If the aim is to simply hide money, using a store of value that is automatically recorded on a transparent, permanent ledger does not seem like a smart idea. According to Maria Stankevich, chief business growth officer at cryptocurrency exchange EXMO UK, “today huge BTC acceptance is closely linked not to shadow finance, but rather the reverse — to its position as an open financial asset.” According to Tim Byun, global government affairs officer at cryptocurrency exchange OKCoin:
“Taxing the ultra-wealthy has little or no impact on the surging adoption among all Americans and non-Americans into digital assets, specifically Bitcoin. […] It’s foolish to think that they (as well as anyone) will look to Bitcoin as a way to ‘hide’ their wealth given that bitcoin leaves a permanent digital footprint.”
The perception of digital assets and Bitcoin (BTC) as a place to conceal money, according to Douglas Borthwick, chief marketing officer at digital asset company INX, is “very off-base.” Although US tax residents can still purchase Bitcoin on offshore platforms in the absence of stringent Know Your Customer and Anti-Money Laundering criteria, there are significant risks involved with distribution and custody. Millionaires, according to Borthwick, usually use the following strategies:
“They invest in high-ticket items to guard against inflationary purchases. Think of Masters’ paintings and parcels of real estate. There are many strategies that ultra-wealthy investors employ with their accountants to avoid more significant taxes. I’m not sure that digital assets would lead the charge there.”
According to OKCoin’s Buyn, the ultra-rich will continue to protect their riches “by tried and tested means because they have access to the brightest attorneys, financial advisers, and consultants.”
An indirect effect?
Even if digital assets are ineffective at concealing households’ true nett worth, there could be other ways for a potential wealth tax to increase millionaires’ interest in crypto. Here’s an example.
According to a January study by the tax reform nonprofit Tax Foundation, a 2% to 3% wealth tax could wipe out interest earnings on safer assets such as bonds and bank deposits. This may be enough of an external shock to cause wealthy investors to rethink the composition of their investments and recalibrate them to add more weight to riskier but higher-yielding securities.
In other words, the hypothetical tax might encourage the wealthy to invest in cryptocurrencies and crypto derivatives in order to offset stagnant returns from more conventional investments.