- Bitcoin holders have until the end of 2021 to reduce their tax obligations by selling assets at a loss and buying them back.
- The Ways and Means Committee is deliberating on closing this loophole and it could have grave financial repercussions for cryptocurrency traders.
- This is a means to fund President Biden’s over $3.5 trillion social safety net.
The House is going after a lucrative tax loophole that had been previously exploited by cryptocurrency investors. The review will make investors wait 30 days before repurchasing a crypto asset when a tax deduction is in the picture.
Closing The Loophole
The House Ways and Means Committee is currently exploring the possibility of bringing to an end a method that aids cryptocurrency investors on tax-loss harvesting issues. The move is designed to apply the wash-sale rule to digital assets, making investors wait 30 days before buying a security that they had previously sold to prevent them from claiming a tax benefit.
According to the Joint Committee on Taxation, this could cost cryptocurrency investors up to $17 billion and analysts posit that this is one in several ways Democrats are hoping to fund President Biden’s expansion of the US social safety net. If the bill is passed, it is scheduled to come into effect on January 1, 2022, leaving investors with just under 3 months to take advantage of it.
Shehan Chandrasekera, CoinTracker.io’s Head of Tax Strategy said, “One thing savvy investors do is sell at a loss and buy back Bitcoin at a lower price”. The reason this works is that the Internal Revenue Service views cryptocurrencies differently from stocks and treats them like property. According to Chandrasekera, investors rack up multiple losses to “carry them into an unlimited number of tax years.”
Aside from significantly reducing their taxes, investors can buy the dip and reap the benefits of a strong price rally, thereby increasing their profitability. However, Chandrasekera warns that “without detailed records of your transaction and cost basis, you cannot substantiate your calculations to the IRS” and so, it is imperative that investors keep accurate books.
There’s Still Time To Take Advantage
The bill has to pass the hurdle of both the House and the Senate before it becomes applicable. It is believed that it might scale through because it views cryptocurrencies as a security and will give regulators greater control over the asset class.
The rule will not be retroactive if it comes into effect in January 2022 giving investors ample time to capitalize on the opportunity. Chandrasekera puts it succinctly, “Taxpayers can still reduce their 2021 tax bill, but they only have a few months left to do that… with the market down the last two weeks, it’s great timing.”