Would a US wealth tax push millionaires to Bitcoin adoption?

There are ways in which a tax on the ultra-wealthy could nudge them toward crypto, but hiding assets is not one of them.

Levying a progressive tax on the ultra-wealthy has been a talking point long popular with many United States Democrats, yet such a policy would have been unimaginable under a Republican administration and a split Congress.

Now that the Democratic Party is back in control of both the White House and Capitol Hill, the initiative is formally on the table: On March 1, a group of Democratic lawmakers led by Sen. Elizabeth Warren introduced legislation proposing an annual tax on the households and trusts worth more than $50 million, including the value of assets such as real estate and stocks.

As new bridges between traditional capital and the digital asset space emerge almost daily, high-net-worth individuals can move value to crypto with more ease than ever before. Would a prospective wealth tax, should it be codified in law, affect their willingness to do so?

Warren’s plan

Marketed as the Ultra-Millionaire Tax Act, Sen. Warren’s bill proposes a 2% annual tax on the net worth of any household between $50 million and $1 billion, and a 3% tax for those worth more than $1 billion. The framers contend that the burden will only fall on the wealthiest 100,000 households in the nation, or the top 0.05% of wealth distribution.

The lawmakers argue that the initiative could bring in at least $3 trillion in federal revenue over 10 years — a pool of resources that could be directed to support underfunded areas such as education, childcare and infrastructure.

The proposed legislation would have to clear the U.S. Senate before it becomes law. Even though Democrats and Republicans are currently tied 50-50 in the chamber, with the Democratic Vice President Kamala Harris holding a tie-breaking vote, most bills still take at least 60 votes for approval. As Bloomberg noted, Democrats are at least hoping to append some elements of the tax to the budget bill that will be reconciled later in the year.

Criticisms abound

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 arguing that 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 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 quip about using gold to hide one’s net worth is metaphorical, a reference to the kinds of assets that can be less visible to the government’s eye compared with those sitting in bank and brokerage accounts. As for the actual gold, the IRS treats precious metals as collectibles subject to long-term capital gains tax. Cryptocurrencies definitely do not belong in either of these categories, as they are neither collectibles (unless they are nonfungible tokens) nor less visible.

If the goal is literally to conceal the wealth, resorting to a store of value that is automatically tracked on an open, immutable ledger doesn’t sound like a good idea. Maria Stankevich, chief business development officer at cryptocurrency exchange Exmo UK, commented to Cointelegraph: “Today massive BTC adoption is tightly connected not to the shadow money, but quite to the opposite — to its status of the transparent financial asset.” Tim Byun, global government relations officer at crypto exchange OKCoin, added:

“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.”

Better ways

Douglas Borthwick, chief marketing officer at digital asset firm INX, said that viewing digital assets and Bitcoin (BTC) as a place to hide wealth is “rather off-base.” While U.S. tax residents can still buy Bitcoin on offshore platforms without rigorous Know Your Customer and Anti-Money Laundering requirements in place, there are serious risks associated with delivery and custody. According to Borthwick, millionaires typically resort to other 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.”

OKCoin’s Byun opined that the ultra-rich will continue to preserve their wealth “through tried and true means as they have access to the brightest lawyers, financial advisors and consultants.”

An indirect effect?

Even if digital assets are no good for concealing households’ actual net worth, there could be other avenues for a hypothetical wealth tax to heighten millionaires’ interest in crypto. Here’s one:

According to a January report by the tax policy nonprofit Tax Foundation, a wealth tax of 2% to 3% could erase interest earnings on safer investments like bonds and bank deposits. This could become enough of an external shock to make wealthy investors reconsider their portfolios’ structure and recalibrate them so as to give more weight to the more risky yet higher-yield assets.

In other words, the hypothetical tax could embolden the rich to invest in cryptocurrencies and crypto derivatives to offset the stagnating gains from more traditional assets.