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The popularity of cryptocurrency has been on the rise for years. But 2020 has been a very special year with many more retail investors getting exposure to bitcoin during the COVID-19 lockdown, public companies like MicroStrategy MSTR , Square SQ , and Grayscale beefing up their bitcoin holdings, and major fintech companies like PayPal PYPL introducing cryptocurrency products. As we end the year amidst a strong bull market, this is a great time to look into the 2021 year and discuss what we can expect in the crypto tax space.
In 2021, 150 million American taxpayers will be asked at the top of the front page of IRS Form 1040: “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”. This will also make cryptocurrency taxes which was once a niche subject a more mainstream area of taxation that all accountants need to be aware of.
The cryptocurrency space has rapidly evolved since the IRS issued the original virtual currency tax guidance back in 2014. Novel concepts like staking, yield farming, and various Decentralized Finance (DeFi) transactions are left unaddressed by the existing IRS guidance. With Ethereum (second largest cryptocurrency), transitioning from Proof of Work (PoW) to Proof of Stake (PoS) consensus, there will be increased pressure on tax regulators to review existing generic guidance and introduce more specific guidance. Specifically, we might expect to see additional IRS guidance around DeFi transactions in 2021.
Currently, tax information reporting among crypto exchanges is not standardized. Some crypto exchanges issue Form 1099-Ks while some have opted not to issue any forms or issue other forms like 1099-Bs and 1099-MISCs. Form 1099-Ks have caused considerable confusion among taxpayers and lead to CP2000 tax notices. In 2021, we can expect cryptocurrency exchanges to be under more scrutiny by the IRS and other watchdogs (e.g. OECD) and face a lot pressure to comply with more comprehensive and uniform reporting standards.
During 2020, we saw multiple high-profile tax evasion cases related to cryptocurrency including the indictment of John McAfee and Amir Bruno. As the next year unrolls, expect the IRS to initiate more action against people attempting to evade taxes on their cryptocurrency or fraudulently underreporting cryptocurrency income.
It has been an amazing ride to watch the crypto space grow over the past decade, and it will be interesting to reflect on these predictions one year from now.
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Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.
Bloomberg crypto analysts say that history suggests it is only a matter of time before Bitcoin reaches a market cap of $1 trillion, which would bring the BTC price to $55,000 per coin, and they argue that global demand supports the cryptocurrency rising throughout next year to reach that level by 2022.
According to the Bloomberg Crypto Outlook – December 2020 edition, Bitcoin will continue to advance in price into 2021 with “macroeconomic, technical and demand vs. supply indicators supportive of $50,000 target resistance, implying about a $1 trillion market cap.”
The anaylsts predict that BTC’s price should be around $40,000 in 2021 followed by around $55,000 in 2022 when Bitcoin inevitably breaks the $50,000 resistance.
The Bloomberg analysts believe that for Bitcoin, the $10,000 mark has now been flipped to become a critical support level after serving as the crypto’s resistance mark since 2017. The report argues that should the market experience another crash as occurred in March 2020, $10,000 would be Bitcoin’s floor.
Bitcoin Demand and BTC Market Maturation
The Bloomberg analysts, led by Mike McGlone on this crypto outlook, believe that 2020 will be looked back upon as key to Bitcoin’s mainstream evolution, helped along by extraordinary economic circumstances.
The Bloomberg analysts write:
“The foundation solidified in 2020 for the benchmark crypto, embraced in more global investment portfolios as holders expand beyond tech geeks and speculators, fueled by unparalleled quantitative easing, rising debt-to-GDP and declining supply.”
From December 2020, the analysts predict that the maturation of cryptocurrency investment may see Bitcoin’s price start to appreciate slower, but increasing demand will “result in more of the same” increases and that Bitcoin remains firmly in price discovery stage.
The report reads:
“Demand measures of Bitcoin and crypto assets appear to be gaining endurance for more of the same in 2021. From the Office of the Comptroller of the Currency (OCC) allowing banks to provide crypto-asset custody services to PayPal onboarding payments, clearing 2020’s volatility hurdle likely widens the path toward mainstream adoption.”
$55,000 Bitcon and $1 Trillion Market Cap
According to the Bloomberg Intelligence report, Bitcoin’s history suggests that a $1 trillion market cap by 2022 vs. about $300 billion on Nov. 13—is extremely possible. The analysts cite increasing demand, growing adoption and interest vs. Bitcoin’s increasing scarcity as a reason the BTC price will maintain its bull run in 2021 and will find resistance around the $50,000 price level.
The Bloomberg graphic depicts Bitcoin’s market-cap regression line since $10 billion in 2013 showing that the pioneer crypto is on pace for a $1 trillion market cap by about 2022. At this cap, the BTC price could soar to around $55,000 vs. the current level around $19,000 levels.
The report reads:
“If the future rhymes with the post-halving years of 2013 and 2017, and we factor maturity of about a quarter of the 2017 advance, Bitcoin may reach $40,000 in 2021.”
As 2020 draws to a close, the analysts conclude that there seems to be little to stop Bitcoin’s upward trajectory, particularly following its correction and a period of disdain. While they predict that BTC will move sideways for a few months, the price outlook of $40,000 for 2021 implies that this bull run not stopping anytime soon.
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