Here's Why Bitcoin Could Plunge This Week

Most major cryptocurrencies are having a slow start to the week. Bitcoin (BTC-USD) is down by nearly 4% to about $6,750, and all but two of the 10 largest cryptocurrencies are in the red.

However, there could be more downside to come over the next week or so. Specifically, the upcoming U.S. tax deadline could be a major negative catalyst. Here's the latest cryptocurrency price action and why cryptocurrency investors should care that Tax Day is rapidly approaching.

Image source: Getty Images.

Today's cryptocurrency prices

Here's a look at the 10 largest cryptocurrencies by market capitalization, and how much each has changed over the past 24 hours.

Data source: www.investing.com. Prices and daily changes as of April 9, 2018 at 3:25pm EDT, and prices are rounded to the nearest cent where appropriate.

Tax Day could be a driver of cryptocurrency volatility

Tax Day in the United States falls on April 17 in 2018, which is next Tuesday. And to make a long story short, lots of Americans owe the IRS money because of cryptocurrency profits, and Tax Day is the last day to pay the money you owe without possible penalties and interest.

According to a recent report by Tom Lee, head of research at Fundstrat Global Advisors, there's roughly $25 billion in tax liability among U.S. households for cryptocurrency gains.

Here's the key point. Many people who made lots of money on cryptocurrencies in 2017 likely don't have the cash on hand to cover their capital gains taxes, so they may need to sell additional cryptocurrency holdings in order to raise the cash to pay the IRS. Considering that the entire (worldwide) cryptocurrency market cap is currently $258 billion, the $25 billion in possible U.S. capital gains tax liability is a relatively large amount of money.

To be clear, not all investors who sold cryptocurrencies in 2017 will need to raise capital in this manner. However, it's fair to assume that some will, and this could certainly put downward pressure on the market.

The peak tax-related volatility is likely to occur this week as it generally takes a few days to sell cryptocurrencies on an exchange, withdraw the cash to a bank account, and then pay the IRS.

How are cryptocurrencies taxed?

I've written a more in-depth discussion of cryptocurrency taxation, which I encourage you to read if you think you may owe taxes on cryptocurrency gains. (Note: The article is about bitcoin (BTC-USD) profits, but the same rules apply to other cryptocurrencies as well.)

The short version is that cryptocurrencies are considered to be "intangible property" by the IRS, which means that they are subject to capital gains taxes just like stock and bond investments.

If the asset has been held for a year or less, any profits will be considered short-term capital gains, which are taxed as ordinary income according to the IRS tax brackets. On the other hand, if the asset in question has been held for over a year, it is subject to long-term capital gains tax rates, which are generally more favorable.

Finally, it's important to note that cryptocurrency gains aren't taxable until you sell your holdings or until you exchange them for something else of value. For example, if you bought $1,000 worth of bitcoin in the early days, and it's now worth $1 million, as long as you still own the bitcoin, you won't have to pay any tax. On the other hand, if you sell some of it or use some of your appreciated bitcoin holdings to buy something, you will have triggered a taxable event.