Inside a $3.5trl spending package stalled in the US House of Representatives is a provision that would close a tax loophole for cryptocurrency investors who use losses as tax write-offs and establishes the idea that digital assets are securities, not currency.
Currently, cryptocurrencies are not subject to so-called wash-sale rules that prevent investors from selling under-water investments and then writing them off on their taxes before repurchasing them or nearly identical investments within 30 days.
For example, an investor could buy $70,000 worth of bitcoin and sell the investment after the price falls to $60,000. The investor could then use the $10,000 loss to reduce capital gains taxes and then buy more bitcoin and profit from the increase if the value goes back up.
Tucked inside the spending bill, known as the Build Back Better Act, is language to close the loophole. If the bill becomes law, cryptocurrency gains would be taxed the same as stocks, bonds and other securities.
With the volatility of cryptocurrency markets now, investors are already seeing losses ahead of the 31 Dec. 2021 tax deadline.
Sources told Capital.com that this part of the bill hasn't been scored, but they estimate the government is losing millions annually while the wash-sale rule is not being applied to cyptocurrency.
Impact of the rule change
The closure of the loophole will educate investors on how to treat their gains or losses, according to Garrett Watson, The Tax Foundation’s senior policy analyst.
Watson said investors may be having trouble keeping track of their losses and gains since coins are now being bought on centralized and decentralized platforms. These purchases are not being tracked, unlike purchases at a brokerage firm.
Under the new rules investors would most likely have to use crypto accounting programs like CoinTracker to prepare their tax returns, he said.
The spending bill was still being debated Wednesday afternoon.
There are plans to pare down the bill to ensure passage, but it is too early to say if the wash-sale rule is on the chopping block, sources told Capital.com.
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