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A bill unveiled on Thursday as part of the Democrats’ $ 1.75 trillion social and climate spending plan would close a tax loophole for cryptocurrency investors.
The Build Back Better Act would make crypto transactions subject to “wash sale” rules, an anti-abuse measure that currently applies to stocks, bonds and other securities, according to a draft released by the House Rules Committee.
As a result, Bitcoin, Ethereum, Dogecoin, and other cryptos would be subject to the rules. They prevent investors from taking tax benefits from an investment loss and then quickly repurchasing the same asset, effectively keeping property.
The new proposal would apply after December 31st.
The rules committee proposed its almost final bill after the White House unveiled a policy framework Thursday morning, the result of months of negotiations between moderate and progressive Democrats.
Legislation can still evolve and its success is not guaranteed. The Democrats in both houses need almost full party support for the measure to pass in the face of the united republican opposition. Major objectors have not made a public commitment to vote in favor.
A tax proposal from the House Ways and Means Committee last month also aimed to make digital currencies subject to laundry sales.
The IRS treats crypto as property, not security, which makes the asset class escape wash-sale rules under applicable law.
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This gives crypto investors 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 won investments in their portfolio.) Then they can quickly buy back the sold cryptos for a price rally – which is not far-fetched given the cryptos Volatility.
In comparison, equity investors may not purchase an identical or similar security within 30 days before or 30 days after a sale without incurring penalties.
The move is part of a series of tax reforms that would raise nearly $ 2 trillion in climate investments and a significant expansion of the U.S. social safety net, including universal preschool, expansion of health care and financial support for childcare.
Subjecting crypto and other assets to laundry sale rules would raise $ 16.8 billion, according to estimates by the Joint Tax Committee released last month.
With crypto ultimately subject to wash sale rules, investors may be able to quickly build positions in another coin without stumbling.
According to Ivory Johnson, a certified financial planner and founder of Delancey Wealth Management in Washington, DC, cryptocurrencies are so diverse that selling Bitcoin and then quickly buying Etherum would likely not break the rules
“The similarities start and end with the coins being exchanged on a blockchain,” Johnson told CNBC. “According to this logic, stocks that are traded on a stock exchange, on the NYSE or otherwise are not regarded as one and the same.”