It’s that time again—a planned Bitcoin event reducing Bitcoin miner’s rewards in half, hence the name, Bitcoin halving.
We’ve been here twice before, but for something so predictable in many ways, Bitcoin halving hasn’t gotten any less exhilarating for the crypto community.
This is the third halving with dozens more to come.
There’s no cryptocurrency mystery surrounding the Bitcoin halvings themselves – they happen automatically with no action required by anyone.
The forecasts have been all over the board. The predictions outlandish, and the disagreements have ranged from the rise and fall of Bitcoin (and everything in between).
There has been a collection of arguments for why this time is different from doubts in two data points being able to establish a pattern to various structural or fundamental underpinnings that have changed over time.
But we at Donnelly Tax Law are not in the business of predictions; we are in the business of taxes.
So, we left the predictions to the relative experts and have had them explain what the point of Bitcoin Halving is and how it works.
“The 2020 halving, the third in the network’s history, means the mining reward has now been reduced from 12.5 bitcoin per block to 6.25 units. It went down to 25 from 50 bitcoin per block in November 2012 and further decreased to 12.5 units in July 2016.” – Coindesk.com
What's the point of Bitcoin halving?
The point of Bitcoin halving as shared by the experts at Bloomberg.com:
- Bitcoin’s issuance is limited in several ways.
- For one thing, according to its founding protocol, just 21 million Bitcoin will ever be in circulation. That’s appealing to many who fear that fiat money – the kind issued by governments – can lose its value to inflation if too much is printed.
- Supporters argue that Bitcoin, by contrast, will be guaranteed to increase.
- Halving also prevents inflation by acting to periodically slow the pace at which Bitcoins are created so as not to outstrip demand.
- To other observers, halvings can serve as a hurry-up-and-buy signal by suggesting that a bump in price could accompany slower growth.
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How does the Bitcoin halving affect price?
How Bitcoin halving affects price as shared by the experts at Forbes.com:
- Michael Dubrovsky, cofounder of the mining company PoWx sheds light on how the Bitcoin halving impacts price, “The theory is that there will be less Bitcoin available to buy if miners have less to sell.” So, from a supply-demand perspective:
- If Bitcoin supply decreases and the demand for Bitcoin stays the same, then the price of Bitcoin will increase.
- If Bitcoin supply decreases and the demand for Bitcoin increases (ie. Institutional investors, millennials, or boomers, etc. looking to capitalize on the hype increases), then the price of Bitcoin will see a significant increase in price.
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What are the tax considerations of the Bitcoin halving?
The tax considerations of Bitcoin halving as shared by our expert Crypto Tax Fixer, Clinton Donnelly at DonnellyTaxLaw.com:
Income tax is only assessed on the gains and income of cryptos. So the halving effects different crypto owners differently.
Who does the Bitcoin halving affect?
The halving affects the miners the most. It changes the profitability of their company.
To continue mining, most miners have to buy new mining equipment. However, the tax laws favor writing off the cost of new equipment in the year you purchase it, which can create significant short-term tax benefits.
If you are a miner, your income goes down, so it makes it harder to have a profitable business. But an unprofitable business can offset income in other areas of your life.
Mining companies may be eligible for some emergency economic stimulus because of the costs of operating a mining farm.
Hodlrs are not affected by the halving. It promises a rapid rise in the price of Bitcoin and other coins. But there is no tax consequence until you trade one coin for another coin or for fiat.
Active crypto traders are not affected by the halving other than the hope of having more substantial profits in the future.
What tax lessons have we already learned?
One crucial lesson active traders learned from 2017 is that it's imperative to save money to pay the taxes on net gains as you make crypto to crypto trades where a profit is made.
One way to do that is by using a crypto gain calculation service like:
These tools can help you track your cumulative gains and losses as you come into the end of the year. This tracking will help you plan on how much to save for taxes.
If the market does go up significantly this year, using these tools can help you with tax harvesting techniques.
Harvesting techniques are merely cashing out the losing coins to offset your tax gains during the year.
To get crypto tax help for your particular situation, schedule an appointment with Donnelly Tax Law.
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