House Democrats' Plan Would Close Tax Loophole Used by Crypto Investors

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  • House Democrats proposed a bill Monday that would impose "wash sale" rules on commodities, currencies and digital assets.
  • Bitcoin, ethereum, dogecoin and other crypto would be subject to the anti-abuse rules, just like stocks, bonds and other securities.
  • Currently, crypto investors have a dual benefit: They can claim a tax loss and quickly buy back the asset they sold to capture any upswing in price.

House Democrats proposed legislation Monday that would close a tax loophole for cryptocurrency investors.

The bill would impose "wash sale" rules on commodities, currencies and digital assets, according to an outline issued by the House Ways and Means Committee.

That means bitcoin, ethereum, dogecoin and other popular crypto investments would be subject to the anti-abuse rules, which apply to stocks, bonds and other securities.

Wash sale rules prevent investors from reaping tax benefits from a losing investment and then immediately buying back the same asset.

The IRS treats crypto as property, not as a security, which is how the asset class escapes the rules.

Crypto investors reap two benefits as a result: They can sell crypto for a loss and claim a tax benefit. (That loss can reduce or eliminate capital gains tax on winning investments.) Then, they can quickly buy back the crypto they sold to capture any rebound in price — which isn't far-fetched given crypto's volatility.

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By comparison, stock investors aren't allowed to buy an identical or similar security within 30 days before or 30 days after a sale without triggering penalties.

House Democrats' proposal would apply to sales after Dec. 31, 2021.

Subjecting crypto and other assets to wash sale rules would raise $16.8 billion over a decade, according to estimates published Monday by the Joint Committee on Taxation.

The measure is among a series of tax reforms Democrats are considering to raise money for climate investments and a significant expansion of the U.S. social safety net, expected to cost up to $3.5 trillion.

Overall corporate and individual tax reforms outlined Monday would raise almost $2.1 trillion over a decade.

If crypto is ultimately subject to wash-sale rules, investors may be able to speedily establish positions in a different coin without getting tripped up.

Cryptocurrencies are dissimilar enough that selling bitcoin and then quickly buying etherum, for example, likely wouldn't violate the rules, according to Ivory Johnson, a certified financial planner and founder of Delancey Wealth Management in Washington, D.C.

"The similarities start and end with the coins being exchanged on a blockchain. Using that logic, stocks traded on an exchange, NYSE or otherwise, are not considered one and the same either," Johnson said. "Stated plainly, bitcoin is to ether what Gold is to Visa — they're not 'substantially similar' and should not in my opinion trigger the wash sale rule."

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