A cryptocurrency tax loophole that’s helped investors save thousands of dollars may be closing in the next few months.
It’s been reported that the House Ways and Means Committee is looking to expand the wash sale rule so that it applies to cryptocurrencies starting in the 2022 tax year.
In this article, we’ll discuss what the wash sale rule is and how this change will affect cryptocurrency investors like you.
Claiming a capital loss can reduce your tax burden for the year. Capital losses can offset capital gains and up to $3000 of your personal income.
As a result, many investors claim capital losses on stocks, cryptocurrencies, and real estate to minimize their tax bills.
Of course, not every loss can be claimed on a tax return. The wash sale rule says investors are not allowed to claim capital losses on a stock if they buy the same stock 30 days before or after the sale.
Currently, the wash sale rule applies only to securities (like stocks). However, Bitcoin and other cryptocurrencies are classified as property by the IRS. As a result, it’s reasonable to assume that the wash sale rule does not apply to cryptocurrency at this time.
For more information, check out our complete guide to crypto tax-loss harvesting.
Recently, the Federal government has signaled a willingness to step up enforcement of cryptocurrency taxation. The 2021 infrastructure bill will increase reporting requirements for anyone who facilitates a cryptocurrency transaction.
Of course, that’s not the only proposed change to crypto tax law. It’s been reported that the House Ways and Means Committee is discussing expanding the wash sale rule so that it applies to cryptocurrencies. This is a part of a series of proposed measures designed to raise money for an upcoming $3.5 trillion spending package.
Documents obtained by the press suggest that the wash sale rule will begin applying to cryptocurrencies for transactions made after December 31, 2021.
Because the wash sale rule will take effect in 2022, it’s likely that it will not apply to transactions made during the 2021 tax year. It’s reasonable to assume that at this time, investors can sell their cryptocurrency at a loss, claim a capital loss, and reenter the position.
Still, it’s important to take steps to prepare for this change. In the future, investors will need to track the dates they bought and sold their cryptocurrency if they wish to re-enter the market while still claiming their capital loss.
If you’re looking for an easy way to manage your crypto taxes and identify which of your trades would be considered wash sales, try CryptoTrader.Tax. More than 100,000 investors use the platform to keep track of their cryptocurrency transactions across multiple wallets and exchanges.
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