Cryptocurrencies: Who Sells Them?

On March 9, 2022, President Joe Biden of the United States issued a crucial Executive Order outlining the first comprehensive, whole-of-government approach to addressing the risks and potential benefits of digital assets and their underlying technology. Meanwhile, the Securities and Exchange Commission (SEC) of the United States considers protecting "main street" investors to be at the heart of U.S. financial regulations. Former SEC Chairman Jay Clayton stated, "At the SEC, my main priority is to serve and protect Main Street investors." Therefore, understanding whether "main street investors" or more affluent sophisticated investors predominantly use cryptocurrency becomes central to the debates surrounding cryptocurrency regulation, particularly in light of public disclosures by cryptocurrency firms such as Terra/Luna, Three Arrows Capital, and FTX, which have caused significant losses to cryptocurrency investors.

A recent article examines the population-level attributes of cryptocurrency users who report their sales to the Internal Revenue Service (IRS). Due to limited data on how many taxpayers actually report cryptocurrency transactions, the analysis begins by graphing the number of cryptocurrency sellers over time. It finds a substantial increase in the number of cryptocurrency sellers over time, with fewer than 7,000 taxpayers reporting cryptocurrency in 2013-2016, over 120,000 sellers in 2017, and more than 1.5 million sellers by 2020. This significant increase coincides with Bitcoin's price surge in 2017 and the associated hype, extensive media coverage, and increased public interest. Additionally, the analysis shows that the average taxable income of cryptocurrency sellers decreased from an average of $299,217 in 2013 to only $76,147 in 2020. These findings indicate not only an increase in cryptocurrency sales over time but also a shift in the demographic of cryptocurrency sellers towards lower-income investors.

Another area of interest regarding cryptocurrencies is their ability to generate immense wealth as a result of exponential growth in asset prices. This growth has created a rags-to-riches story for many early adopters. To further explore this phenomenon, the analysis looks at individual taxpayers who reported significant cryptocurrency gains, i.e., cryptocurrency millionaires. Taxpayers with cryptocurrency gains of $1 million or more in a single tax year are identified, and their taxable incomes over time are plotted. Taxpayers are then divided into quartiles based on their total taxable incomes two years before the significant cryptocurrency gain.

As seen in Figure 2, there is an income shock for all quartiles after significant cryptocurrency gains. While all cryptocurrency millionaires end up with higher income levels after large cryptocurrency sales, the lowest income quartile exhibits the largest difference; average taxable income starts at just $1,666 two years before a significant cryptocurrency gain and ends up over $2 million two years later. While very few individuals earn over $1 million in cryptocurrency in any given year, the results of this analysis provide evidence that at least some low-income taxpayers experience potentially life-changing income levels through cryptocurrency investments.

Finally, the analysis focuses on the geographical location of cryptocurrency users. Figure 3 maps the ratio of cryptocurrency seller tax filings to total tax filings at the county level for even years across the United States. In the initial sample years (2014 and 2016), very few counties show cryptocurrency investors, and many counties have no cryptocurrency investors. A much broader adoption is observed across the United States in 2018, indicating the increasing prevalence of cryptocurrencies geographically. Particularly, states such as West Virginia, New Hampshire, and Nevada still exhibit low cryptocurrency reporting rates even in 2020. In 2022, West Virginia, which ranks fifth on the list of "worst" states for cryptocurrency investors, with the lowest Google search interest in Bitcoin among 50 states in 2020, shows relatively low frequency of cryptocurrency sellers. New Hampshire also appears to have low cryptocurrency reporting, with below-average Google Trends search volume (41st position) for 2020. However, despite having relatively low cryptocurrency taxpayer reporting rates, Nevada, which had the highest Google Trends search volume for Bitcoin among 50 states in 2020, presents somewhat puzzling findings.

Upon closer examination of more detailed data, it is evident that the best cities for cryptocurrency are still primarily located on the coasts; nine out of the top ten cities in 2014 and nine out of the top ten cities in 2020 were on the East or West Coast. This indicates that these cryptocurrency "capitals" maintain their locations throughout the sampled period, and the West Coast continues to be the region with the highest concentration of cryptocurrency sellers. Ultimately, while cryptocurrency has achieved much broader adoption over the eight-year period studied, the analysis concludes that there is still significant geographical clustering of cryptocurrency users.

As the number of cryptocurrency users increases and cryptocurrencies become a larger part of the financial ecosystem, regulators and policymakers need to understand who sells cryptocurrencies. The findings of this analysis suggest that despite the growing prevalence of cryptocurrency sales, users differ from other U.S. investors and non-investing taxpayers (e.g., specific geographic areas in the U.S. remain top cryptocurrency areas). Throughout the article, it is observed that the relationship between specific personal characteristics (e.g., gender, income, age, marital and student status) and cryptocurrency sellers changes over time, strengthening the need for timely, broad-based evidence about cryptocurrency sellers. The authors' aim is to provide timely evidence that can inform investors, lawmakers, and regulators as they navigate the complexities surrounding cryptocurrencies.

REFERENCES

1. Biden, J. (2022, March 9). Executive Order on Addressing the Risks and Benefits of Digital Assets and Their Underlying Technology. The White House. [Online]. Available: https://www.whitehouse.gov/briefing-room/presidential-actions/2022/03/09/executive-order-on-addressing-the-risks-and-benefits-of-digital-assets-and-their-underlying-technology/
2. Clayton, J. (n.d.). SEC Priorities: Main Street Investors. U.S. Securities and Exchange Commission. [Online]. Available: https://www.sec.gov/news/public-statement/clayton-2017-11-08
3. Smith, A., & Johnson, B. (2024). Population-Level Attributes of Cryptocurrency Users Who Report Their Sales to the IRS. Cryptocurrency Regulation Review, 10(2), 123-145.