Wash sale rules could apply to bitcoin and ethereum in expense bill

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The House Ways and Means Committee is trying to close one of the most lucrative crypto tax loopholes, a move that could cost holders of bitcoin and other virtual coins nearly $ 17 billion, according to an estimate by the Joint Committee on Taxation .

The bill would apply the so-called wash-sell rule to digital assets, according to a committee summary report, treating them like stocks. The rule requires an investor to wait 30 days between the sale of a security and the redemption of it, in the case of a tax deduction.

It is one of the tax hikes being considered by Democrats as a way to fund the $ 3.5 trillion in spending proposed by President Biden to expand America’s social safety net. While Democrats face many hurdles to finalize the legislation and pass it through a deeply divided Congress, crypto experts are already looking for ways to help investors minimize their 2021 tax.

If the proposal passes, taxpayers have until December 31 to take full advantage of the existing loophole, which allows crypto investors to sell coins at a loss for tax purposes and immediately redeem them. Given the recent drop in crypto prices, the market is down 26% from May’s record high, now is the time to reap tax losses.

Minimize your 2021 crypto tax bill

The IRS currently classifies digital currencies like bitcoin as property, so losses on crypto holdings are treated very differently from stocks and mutual funds.

“One thing savvy investors do is sell at a loss and buy back bitcoin for a lower price,” said Shehan Chandrasekera, head of tax strategy at crypto-tax software company CoinTracker.io. “You want to look as poor as possible.”

Chandrasekera added that investors can profit from an unlimited number of losses and “carry them forward for an unlimited number of tax years”.

The bigger the cryptocurrency market, the more this happens.

“I see people doing this monthly, weekly, quarterly, depending on how sophisticated they are,” Chandrasekera said.

The accumulation of these losses allows investors to ultimately offset their future gains and reduce the capital gains tax that would apply to other assets. In other words, they reduce what they owe the IRS.

Another key part of the equation is the rapid redemption of cryptos. If timed correctly, buying the downside allows investors to gain the upper hand, assuming there is a rebound. Digital coins are notoriously volatile, with steep drops often followed by rapid spikes.

Here’s an easy way to think about the equation. Someone who bought bitcoin for $ 10,000 and sold it for $ 50,000 would face $ 40,000 in taxable capital gains if bitcoin were like stocks in Apple or Tesla. But, because of the wash sale loophole, if that same person had already raked in $ 40,000 in losses on previous crypto trades, they could offset the tax they owe.

Chandrasekera said this is an increasingly popular strategy among his company’s clients, but he cautioned that thorough accounting is essential.

“Without detailed records of your transaction and cost base, you cannot justify your calculations to the IRS,” Chandrasekera said.

What could change

The wash sale rule would go into effect on January 1. But to get there, it must be included in legislation passed by the House and Senate.

Chandrasekera is betting the rule will be in the final bill because it aligns with crypto being treated as security subject to the 1099-B report, ”like other investments, he said.

But as it is written, the rule would not be applied retroactively, so that crypto investors have a window available to profit from asset sales.

“Taxpayers can still lower their 2021 tax bill, but they only have a few months left to do so,” Chandrasekera said. “With the market declining over the past two weeks, now is a good time.”

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