Market participants were surprised on Thursday as the Biden administration announced an aggressive policy to tax the rich. The proposal nearly doubles the long-term capital gains tax in certain circumstances and triggered concern about whether there would be a rush to sell in order to beat the new rules.
Bitcoin and cryptocurrencies were particularly hard hit on the capital gains issue. The asset class was already under significant technical pressure and some support levels were broken as the selling intensified.
Bitcoin has been one of the best-performing assets in the world, so there are some very big potential capital gains there. Governments already have been clamping down on tax avoidance in the crypto market and the specter of substantial capital gain taxes is triggering a greater exodus.
It is very unlikely that the tax proposals that were disclosed Thursday will pass in the current form. There is going to be an intense battle over many issues, but the problem for the market is that there is now a clear intent to go after wealth. While most small investors will not be hit directly with higher taxes, they will still need to navigate the pressure created as the whales make their moves to deal with the issue.
The tax issue hits just as some of the hardest-hit small-caps were starting to bounce. Groups such as biotechnology, gambling and cannabis were washed out, finding support and turning up, but it was a fragile recovery and the momentum fell apart quickly on the tax news.
The issue now is whether the market can shrug off the tax issue and rebuild sentiment that was starting to look a bit better. We will need to see how that plays out, but there is likely to be some intense pushback on the tax issue that may give market players some confidence.
The market will finish up the week looking ahead to the most important week of earnings this quarter. Next week we have reports from Tesla (TSLA) , Microsoft (MSFT) , Alphabet (GOOGL) , Apple (AAPL) , Facebook (FB) , Amazon (AMZN) and many other key names. The reaction to those reports will set the theme for where the market is heading in the short term.
We have a light bounce in the early going, but the market is unsettled by the tax issue and won't have any clarity right away.