Quick note: The Dramatic Impact of Zero Capital Gains on Crypto

Here’s a thread I wrote on twitter. But since no one seems to be there, here is the thread here:

Today it was announced that Trump might set capital gains on crypto to zero. When you spend some time thinking about it, this change (if enacted) will have dramatic effects. Here’s why:

Zero Capital Gains (ZCG) on crypto will have mind-boggling implications. In particular, it will lead to ZCG on ANY asset class, plus a huge short term tax revenue.

Trump is reportedly planning ZCG on American-based crypto held for more than a year. The important thing to understand is that you can create crypto that mirrors ANY asset class. So people will be incentivized to sell their liquid assets ASAP, and buy the corresponding crypto coins that mirror that asset class. The 25% better returns are massive sweetener.

For example: Suppose I right now hold $100K of NASDAQ. Someone will set up a coin that mirrors NASDAQ performance (this is existing technology; more on that below). Then I sell my NASDAQ ASAP, and buy $100K of NASDAQ-coin. Voila: I’m now paying zero cap gains on NASDAQ. You can do this with any asset class, even non-fungible ones like real-estate. But it’s easiest with fungible liquid things like stock and bonds.

So, Zero Cap Gains on crypto will have three implications:

1. Most liquid wealth will move over to crypto over a relatively short timespan (a few years)
2. The federal government will experience a HUGE windfall as all the unrealized gains, get realized when moving to crypto.
3. After this short-term windfall, tax revenue drops dramatically, because you’ve now applied zero cap gains to EVERYTHING.

If you’re Trump and you’re really cynical, then this is a GREAT policy: you get a huge tax windfall in 2026–28, and then the next gov cancels the policy.

In the process, you’ve gotten everyone in the economy to realize their gains and pay a ton of cap gains taxes, and you’ve incurred little cost. Also you’e moved a lot of wealth to crypto, which has pros and cons, but is probably a good idea for the long term.

(Note that when crypto gets an influx of $100T+ as a result of this, then infrastructure for normies holding assets in crypto will improve, so crypto usability and reliability and hack-resistance will improve as well.)

Basically, this will make Coinbase the next Interactive Brokers, and will make crypto asset management replace banks. Of course, banks will also open their own crypto custody+trading firms. Basically, it will move all wealth management to crypto.

It’s a really weird effect, but it’s not the worst thing I’ve heard. It will be chaotic and weird, but if you, like me, believe crypto is great for financial efficiency, then it seems like a good way to “rip off that bandaid”.

I still need to tell you how one can create “NASDAQ-coin” without experiencing capital gain leakage somewhere else. If you want deep analysis of this, tell me. Here’s the TLDR:

Option 1: create an offshore entity holding Irish-domiciled NASDAQ tracker. (Tether-style)

Option 2: create synthetic mirroring of NASDAQ cost by using stablecoin mechanisms (DAI style)

I’m sure there’s many more options. Presumably there will be so much demand for these products that there will be a lot of competition among providers.

Bottom line: If Trump really puts zero cap gains on crypto, the implications are hard to predict, and will be totally wild. And interestingly, they might end up well!! But do expect that this will be rescinded by the next administration.