Cryptocurrency Wash Sales May Soon Disallow Digital Asset Tax Losses
Senators are working on approval for a $12.7 billion conservation bill: Recovering America’s Wildlife Act — H.R. 2773 and S. 2372. This bill has recently been stalled due to objections related to how the spending would be paid for. It’s reported by E&E News recently that in negotiations senators were considering closing the wash sale cryptocurrency tax loophole as the funding mechanism.
Wash sales are a powerful tax planning tool used by digital asset and cryptocurrency investors. Below we’ll go over why wash sales and digital assets are being targeted and what taxpayers can do before any new tax regulations realted to wash sales, cryptocurrency and digital assets is implemented.
Cryptocurrency and Digital Asset Wash Sale Tax Code Negotiations
According to E&E News: Ashley Schapitl, a spokesperson for the Senate Finance Committee, which has jurisdiction over the funding, confirmed application of what is known as the “wash sale rule” to cryptocurrency was “an option we continue to discuss.”
If the wash sale rule is applied to cryptocurrency and digital assets then it’s expected to produce $11.2 billion to $12.5 billion in tax revenue over 10 years, depending on how the language is written.
This means that digital asset and cryptocurrency investors will lose $11.2 billion to $12.5 billion in tax savings over the next ten years. There are been many bills preceding this bill and negotiation that have also targeted wash sales, cryptocurrencies and digital assets since the tax savings associated with this is very large.
How Wash Sales Currently Apply To Cryptocurrency and Digital Assets
Wash sales rules apply to securities and disallow the tax losses of any securities that are repurchased in a 30-day period. Currently, since cryptocurrencies are generally classified as property, wash sale regulations should not be a concern for investors. This means investors can sell an investment to realize a tax loss, only to buy it back immediately thereafter to maintain their market position. Wash sales are currently a tax planning tool used by cryptocurrency and digital asset investors to have losses to offset current capital gains along with future capital gains.
This will give you a tax benefit because you will realize a loss on the sale while not changing your overall position in the asset since you repurchased it. It is important to discuss wash sales with your tax advisor on a case by case basis for each asset that you are considering selling and repurchasing.
Since cryptocurrencies have not been labeled a stock or security, the IRS can only tax traders for non-economic substance transactions under property rules which is less likely to apply to most digital assets and cryptocurrencies based on how the tax code currently applies to digital assets and cryptocurrencies.
How To Plan For Changes To Digital Asset and Cryptocurrency Tax Code
Since cryptocurrencies are generally classified as property, wash sale regulations should not currently be a concern for investors. This means investors can sell an investment to realize a tax loss, only to buy it back immediately thereafter. The only additional consideration that should be examined on a asset to asset basis for investors considering this tax strategy is economic substance as it relates to their transactions.
This bill has not been approved and the tax code has not been revised related to wash sales, digital assets and cryptocurrency. Investors should take advantage of this tax planning opportunity while it’s still available as an option. This will give you a tax benefit because you will realize a loss on the sale while not changing your overall position in the asset since you repurchased it. This is a great tax planning tool during bear markets.
How To Harvest Losses Using Wash Sales For Digital Assets and Cryptocurrencies
The key to understanding tax loss harvesting and wash sales opportunities is having up-to-date and accurate cryptocurrency and digital asset accounting. If your accounting is up-to-date and accurate then this means you can review your current tax basis along with current market rates for each digital asset that you own. Then with this information you can sell these assets for a loss. Depending on your overall investment strategy you may buy back some of these assets if you want to hold them for the future and can still take this loss as long as there is economic substance associated with your transaction. It is crucial to have accurate accounting and to review each asset for economic substance if considering wash sales.
We’ve seen yet another bill targeting digital assets and cryptocurrencies for wash sale tax regulations. Whether this bill is approved, it’s clear that this is a focus of many legislators due to the tax value assocaited with this tax stragety. Digital asset and cryptocurrency investors should carefully analyze their portfolio and current tax regulations to take advantage of every current tax opportunity available, including wash sales as applicable.
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