House Democrats have proposed subjecting digital assets, currencies, and commodities to wash sales rules. 🙃
Wash sales, already the enemy of stock and bond traders, prevent investors from selling an asset at a loss to book a “tax break.” Crypto, FX, and commodities traders have taken advantage of the absence of these rules to sell assets at a loss, which counts against capital gains on their taxes (consequently, lowering their tax bill). Afterwards, they buy the assets back.
For example: say you made $10,000 on a stock trade. Your gains would be $10,000. If you bought a crypto and sold it for a loss of $5,000, you would be able to count that loss against your $10,000. However, unlike in the world of stocks and bonds, you would be able to immediately buy back that same asset. This is because crypto, FX, and commodities are taxed as property.
House Democrats suggest closing that “loophole” in other asset classes, according to the proposed legislation. It is estimated to raise $16.8 billion over a decade. The new rule, if passed, would go into effect in 2022.
After that, investors who want a loss to count against their capital gains won’t be able to buy identical or similar assets within 30 days of a sale. If they do, they’ll be slapped with the good ‘ole wash sale. In other words, the loss won’t count.
This will have immediate ramifications in the crypto space. The volatility of the crypto market often makes for big gains and losses. With wash sale rules imposed on crypto and other assets, it’s likely that investors will have to HODL or rethink their strategies. 💡