Build Back Better Act would close the tax loophole for crypto investors

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Photo of Mike Kline (notkalvin) | instant | Getty Images

The bill unveiled Thursday as part of Democrats’ $ 1.75 trillion social and climate spending plan would close a tax loophole for cryptocurrency investors.

The Build Back Better Act would subject crypto transactions to “wash sale” rules, an anti-abuse measure that currently applies to stocks, bonds and other securities, according to a scheme published by the House Rules Committee.

As a result, bitcoin, ethereum, dogecoin, and other cryptos would be subject to the rules. They prevent investors from claiming tax benefits from a loss of investment and then quickly redeeming that same asset, effectively retaining ownership.

The new proposal would apply after December 31.

The rules committee proposed its near-final legislative draft after the White House unveiled a political framework Thursday morning, the result of months of negotiations between moderate and progressive Democrats.

The legislation may still evolve and its success is not guaranteed. Democrats need almost full party support in both chambers for the measure to pass, given the unified Republican opposition. The main dissenters have not publicly committed to vote for him.

A House Ways and Means Committee tax proposal last month also sought to subject digital currencies to wash sales.

The IRS treats crypto as a property, not as a security, which is how the asset class escapes the wash sale rules under current law.

Learn more about Personal Finance: Here’s how Biden’s Build Back Better framework would tax the rich.

Crypto investors get two advantages: They can sell crypto at a loss and claim a tax advantage. (They can use the loss to reduce or eliminate capital gains taxes owed on winning investments in their portfolio.) Then, they can quickly redeem the crypto they’ve sold to capture any rebound in price – which doesn’t This is no exaggeration considering the cryptos. volatility.

In comparison, equity investors are not allowed to buy an identical or similar security within 30 days of or 30 days after a sale without triggering penalties.

The measure is part of a series of tax reforms that would raise nearly $ 2 trillion for climate investments and a significant expansion of the U.S. social safety net, including universal preschool education, expansion of care health care and financial assistance for childcare.

Subjecting crypto and other assets to wash-selling rules would raise $ 16.8 billion over a decade, according to estimates released last month by the Joint Committee on Taxation.

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

Cryptocurrencies are different enough that selling bitcoin and then quickly buying etherum, for example, probably wouldn’t break the rules, according to Ivory Johnson, a certified financial planner and founder of Delancey Wealth Management in Washington, DC.

“The similarities begin and end with coins traded on a blockchain,” Johnson told CNBC. “Using this logic, stocks traded on a stock exchange, NYSE or whatever, are also not considered one and the same.”

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