According to an estimate from the Joint Committee on Taxation, the House Ways and Means Committee wants to close one of the most lucrative crypto tax loopholes. This could result in holders of Bitcoin and other virtual currencies losing nearly $17 billion.
According to a summary by committee, the bill would apply the wash sale rule to digital assets. It treats them as stocks. An investor must wait for 30 days before selling a security or repurchasing it. This is if a tax deduction is involved.
This is one of the tax increases Democrats are looking at to help pay President Biden’s proposed $3.5 trillion spending to expand America’s social safety net. Although Democrats face many obstacles to passing legislation in a divided Congress, crypto experts are already exploring ways to minimize investors’ 2021 tax.
Taxpayers have until December 31 to make full use of the loophole that allows crypto investors to immediately purchase back their coins and sell them at a loss for tax purposes if the proposal passes. Tax-loss harvesting is now possible due to the recent plunge in crypto market prices , which is 26% below a record May.
Minimizing your 2021 crypto tax bill
Digital currencies such as Bitcoin are currently classified by the IRS as property. Therefore, losses from crypto holdings will be treated differently to stocks and mutual funds.
Shehan Chandrasekera is the head of tax strategy at CoinTracker.io. He stated that savvy investors sell at a loss to buy bitcoin back at a lower price. “You want to appear as poor as you can.”
Chandrasekera stated that investors have the option to take advantage of unlimited losses and carry them forward for an unlimited number tax years.
The more cryptocurrencies are traded, the greater the chance of this happening.
Chandrasekera stated, “I see people doing it every month, every weekly, and every quarter, depending upon their sophistication.”
Investors can accumulate these losses to offset future gains and lower capital gains tax. They reduce their responsibilities to the IRS.
Another key aspect of the equation is buying back cryptos quickly. If done correctly, investors can catch the rebound if they buy the dip. Digital coins can be volatile. There are often rapid spikes and steep drops.
This is an easy way to think about the equation. If bitcoin was like stock in Apple and Tesla, a person who bought one bitcoin for $10,000 would be able to claim $40,000 of capital gains. However, the wash sale loophole allows the person to offset any tax they owe if they have previously lost $40,000 on previous crypto transactions.
Chandrasekera stated that it is becoming a more popular strategy for his customers. However, he warned that careful bookkeeping is important.
Chandrasekera stated that without detailed records of the transaction and cost basis, it is impossible to prove your calculations to IRS.
What could change?
The wash sale rule will take effect January 1. It must be included in the legislation that passes both the House and Senate to make it effective.
Chandrasekera believes the rule will make it to the final bill, as it aligns with crypto being subject to 1099B reporting,’ he stated.
However, as the rule is written, it would not apply retroactively to crypto investors, so they have a window of opportunity to benefit from asset sales.
Chandrasekera stated that taxpayers still have time to reduce their 2021 tax bill. It’s a great timing, considering the market has been down for the past two weeks.