Proposed Build-Back-Better Act Closes Loophole Exploited by Crypto Investors
Digital currencies will be subject to “wash sale” anti-abuse rules after December 31, 2021, if new legislation receives a majority Democrat vote.
Following months of negotiations among moderate and progressive democrats, a final legislative draft of a policy framework that includes subjecting digital currencies to wash sales was proposed on 28 Oct 2021. The House Ways and Means Committee tax proposal last month aimed to subject cryptocurrencies to wash sales. This could cost cryptocurrency holders nearly $17B, should the legislation receive a majority Democrat vote and come into effect from 1 January, 2022. The rule used for stocks prevents holders of a stock from repurchasing a stock less than thirty days after it was sold when a tax deduction is involved.
It appears that nothing stops an investor from taking up a position in another coin after selling one that has dipped in value. If bitcoin drops and is sold, nothing stops an investor from buying Ethereum. Alternatively, one could trade a depreciated coin for another coin that tracks the depreciated coin closely, hold that coin for more than 30 days, and then repurchase the original asset.
Crypto investors under the IRS’ microscope
Earlier this year, the IRS said that it was prioritizing an effort to enforce reporting on crypto trades. They already found one investor who didn’t report $5.6M in crypto transactions. The IRS’ search of Coinbase’s customers found 750 who had sold more than $100M in cryptocurrencies.
Since the IRS sees cryptocurrency as property rather than stocks or mutual funds, shrewd investors sell at a loss and buy back at a higher price, to make themselves look as poor as possible. The SEC argues that cryptocurrencies are securities, but the IRS has the final say.
New wash sale rules part of wider U.S. tax reform
This new rule for cryptocurrencies would see a $16.8B increase in tax revenue for the Biden administration over a decade, according to estimates published by the Joint Committee on Taxation. This is part of a number of tax reforms that would raise almost $2T for climate investments, and the widening of the U.S. social safety net.
The legislation may yet see an evolution. Democrats need almost full party support in both chambers for the measure to pass, in the light of unified Republican opposition.
What do you think about this subject? Write to us and tell us!
Disclaimer
All the information contained on our website is published in good faith and for general information purposes only. Any action the reader takes upon the information found on our website is strictly at their own risk.