House Bill Proposes New “Wash Sale” Tax Rule for Cryptocurrency

The U.S. House of Representatives has proposed a bill that, if passed, will have significant tax consequences for cryptocurrency investors. The bill proposes a “wash sale” rule for cryptocurrency similar to the rule that exists today for stocks, bonds and other securities. US International Tax Advisors, explains:

“Wash Sale” Rules Prohibit Tax Deductions for Claimed Investment Losses

“Wash sale” rules prohibit taxpayers from claiming deductions for certain investment losses. Specifically, they make it unlawful for taxpayers to sell investments at a loss (in order to claim a tax deduction) and then immediately repurchase the investments (in order to benefit from subsequent appreciation). The Internal Revenue Code currently contains a “wash sale” rule that applies to securities; but, since the Internal Revenue Service (IRS) has classified cryptocurrency as property, the rule does not apply to Bitcoin and other digital currencies.

This absence of a “wash sale” rule applicable to cryptocurrency has allowed investors to claim losses when their digital assets lose value, but then still participate in gains when the market bounces back. According to estimates from Congress’s Joint Committee on Taxation, cryptocurrency wash sales will cost the federal government $16.8 billion in tax revenue over the next decade if new legislation is not enacted.

Proposed “Wash Sale” Rule for Cryptocurrency Would Apply After December 31, 2021

As proposed, the House’s “wash sale” rule for cryptocurrency would apply to transactions conducted after December 31, 2021. However, while the rule (if enacted) would prohibit selling and immediately repurchasing the same cryptocurrency, it would not necessarily prevent cryptocurrency investors from taking advantage of temporary market downturns by selling one digital currency and immediately purchasing another that has experienced a similar slide. As reported by CNBC:

“Cryptocurrencies are dissimilar enough that selling bitcoin and then quickly buying Ethereum, for example, likely wouldn’t violate the rules, according to [a financial expert]. . . . ‘[B]itcoin is to ether what Gold is to Visa—they’re not ‘substantially similar’ and should not . . . trigger the wash sale rule.’”

Similar to the hotly-debated cryptocurrency reporting requirements proposed in the Senate’s infrastructure bill, whether (and in what form) the House’s proposed “wash sale” rule for cryptocurrency becomes law remains to be seen. However, some form of legislative action appears likely, and cryptocurrency investors should monitor for developments heading into 2022.

What if you have conducted “wash sales” involving Bitcoin or other cryptocurrencies in the past? Currently, these transactions are not prohibited under federal law. However, it will be important to make sure you have accurately reported your cryptocurrency transactions (and associated tax liability) to the IRS; and, if you have any questions or concerns, you should consult with a Maryland tax attorney promptly.

Contact US International Tax Advisors

Do you have questions about cryptocurrency tax compliance? If so, we invite you to schedule a confidential consultation at US International Tax Advisors. To request an appointment with US International Tax Advisors, please call 844-796-8565 or inquire online today.