Bill Would End 'Wash Sale' Loophole for Cryptocurrency

By:
Chris Gaetano
Published Date:
Sep 14, 2021
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A bill recently passed in the House would close a loophole enjoyed by cryptocurrency traders that allows them to significantly reduce their tax burdens from the digital assets, CNBC reported. The issue has to do with how the government treats "wash sales."

Generally, a wash sale happens when someone sells or trades securities at a loss and, within 30 days before or after the sale, the investor either buys substantially identical securities; acquires substantially identical securities in a fully taxable trade, or acquires a contract or option to buy substantially identical securities. The IRS, according to Publication 550, usually prohibits investors from deducting losses related to wash sales. However, the government has so far neglected to apply this rule to cryptocurrencies.

This means that those with cryptocurrencies may sell at a loss, then use that loss to reduce or eliminate capital-gains tax on winning investments. Afterwards, they can quickly buy back what they sold so as not to miss out on a subsequent rebound in price. Those who invest in stocks may do the former maneuver but not the latter without triggering penalties.

This means, for example, that someone who took a $35,000 loss on Bitcoin could use it to wipe out capital gains taxes on a $35,000 stock gain. Further, this same investor could quickly repurchase Bitcoin near its $30,000 low and participate in any run-up. 

The bill essentially subjects crypto assets to the same rules as securities when it comes to wash sales, meaning that investors would no longer be able to enact the strategies described above. It is estimated that eliminating this loophole would raise about $16.8 billion over a decade. Should the bill be passed into law, it would would apply to sales after Dec. 31, 2021.

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