President Joe Biden yesterday dropped a $6.9 trillion budget plan. The huge blueprint—which is expected to be rejected in the GOP-controlled House—wants to increase taxes on the wealthy and corporations to reduce a massive deficit.
And that includes crypto traders and investors. The document says it wants to close the “loophole that benefits wealthy crypto investors” by focusing on wash sales of digital assets. So what will that mean for the average crypto investor if this ambitious proposal is passed?
The proposal says that it wants to “modernize rules, including those for digital assets” and “apply the wash sale rules to digital assets and address related party transactions,” essentially making it so crypto assets abide by the same rules as more traditional investments.
A wash sale is when someone sells a security at a loss, only to then buy the same asset with the hope it will later go up again in value within a 30 day window. In other words, an investor can realize a loss on an asset on paper, securing a tax break for the sold asset, but still later benefit from potential gains on the same asset.
Investors currently aren’t able to create an investment loss for a tax deduction while still having a position in a security. But up to now, this rule has not applied to crypto assets, which has enabled crypto investors to employ tax loss harvesting strategies that are not available to traditional investors.
For example, investors now are able to benefit by buying Bitcoin at $20,000. If it then drops to $17,500 and then sell it, they can realize the loss on paper for tax purposes—but immediately buy more Bitcoin to continue having a stake in the asset.
“Wash sales apply to when you sell something but you buy something identical to something you sold,” CoinTracker’s Head of Strategy Shehan Chandrasekera told Decrypt. “But what happens if you sell Bitcoin but buy back something like Wrapped Bitcoin—it’s not identical—that’s where things can get complicated.”
Wrapped Bitcoin (WBTC) is a token that allows traders who want to use their Bitcoin holdings in the Ethereum ecosystem. It trades at the same price as Bitcoin but runs on a different blockchain.
Lots of different “wrapped tokens” exist but none are mentioned in Biden’s proposal.
Director of Government Solutions at TaxBit Miles Fuller told Decrypt that the elimination of tax loss harvesting could reduce the burden on taxpayers for calculating taxes, as less transactions will need to be sorted through. But the burden would then fall on exchanges.
“The burden on exchanges to track transactions that fall within the wash sale rule and make sure those are ignored for tax purposes will increase,” he said, but added that software could help solve the issue.
For now, the proposal has not been passed—and is likely to face hurdles in Congress. But it’s certain that the government is paying closer attention to digital assets—and wants to regulate them like other investments.