A new bill is advancing in Congress that seeks to treat digital currencies as stocks and other securities. If a majority supports the bill, cryptocurrency investors will have little time to plan against a possible tax increase.
The house bill — pushed by Democrats — proposes a tax-and-spend package, which will expose digital assets to several anti-abuse laws. (For the record, stocks and other securities are already under these laws).
The enactment of the laws will bar investors from using crypto tools to hedge against crypto losses in the future or the lowering of capital gains taxes of digital assets. Once the bill becomes law, a prerequisite that calls for “constructive sale” rules will take effect.
Democrats pushing for new rules for crypto
But crypto investors should worry more about provisions (in the house bill) applying “wash sale” rules set to begin next year.
These rules seek to limit crypto investors from claiming deductions when they sell a digital asset such as Bitcoin at a loss — assuming they bought a similar digital asset within thirty days (before or after initiating the sale).
Democrats want to push these new crypto rules — and a host of other tax code changes — before investors (individuals and corporations alike) have time to avoid tax plans.
But there’s a (small) window investors can exploit.
Investors have two months to capitalize on tax savings
Shehan Chandrasekera, tax strategy manager at CoinTracker, said crypto investors can avoid getting hit with the (looming) tax plans under constructive sale rules — if they can liquidate their offsetting positions or sell one of their positions.
Chandrasekera said investors planning to sell their digital assets at a loss, then buy them back at lower prices to mitigate future capital gain taxes have only two months to aggressively exploit this loophole — before the “wash sale” rules take effect.
But Lisa Zarlenga, a partner at Steptoe & Johnson LLP, is warning crypto investors to exercise caution when selling crypto around December and into early January.
She emphasizes that selling digital currencies at a loss in early January may trigger the wash sale rules, especially if an investor bought a similar digital asset less than thirty days before toward the end of the year (or December).
On Thursday, a joint committee on Taxation estimates that enacting both laws to the wash sale and constructive sale rules will help raise approximately $16.8 billion a year.
Coinbase, the largest US-based crypto exchange, said they’re planning to push the IRS and Treasury to adopt “sensible” crypto regulations, adding that the “[wash sale and constructive sale] rules should not be overly broad such that they stifle innovation…”
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