Are cryptocurrency tax loopholes closing?

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A wave of cryptocurrency tax questions from friends and family hit me this past weekend. I am unsure if it related to the stock market dip on Black Friday and people looking to invest elsewhere, the increase in popularity of digital assets or the fact that news articles are coming out about the House passing the Build Back Better bill on Friday, November 19, 2021. But the question remains. Are cryptocurrency tax loopholes closing?

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For the most part, not much has changed on the treatment of cryptocurrency in the past year and you can check out the IRS website here for more information on virtual currency, or search our blogs by typing in “crypto”. There is however a section in the Build Back Better (BBB) bill that is attempting to close a little-known tax loophole related to cryptocurrencies and other digital assets.

Now, keep in mind that the Build Back Better bill still needs to pass the Senate and then go to the President before it becomes law. But like most things, it is better to plan and be prepared for what could be coming, if not this year, definitely in the near future.

So, what is this tax-loophole you say? Well, if you are familiar with stock trading then you are most likely familiar with the wash sale rule. The wash sale rule states that an investor cannot purchase a security within 30 days (before or after) the sale of the same or substantially similar security and take the loss from the sale on their tax returns. Without the wash sale rule, investors could sell a security and buy it back within 30 days (before or after the sale) and still be in the same position regarding how much of the security they own, while also generating a tax loss to offset taxable income. Who would not want to do that? Currently cryptocurrency and digital assets are not subject to this wash rule and savvy crypto investors have been using this rule to offset their taxable income.

Section 138153, “Wash Sales by Related Parties; Wash Sales of Specified Assets” of the Build Back Better bill is meant to close this tax loophole, however the way the bill is written, (at the time of the writing of this blog) the closure would apply to taxable years beginning after December 31, 2021. Meaning if the bill does not change, the tax loophole is still in effect for the current year ending December 31, 2021.

A text copy of the Build Back Better bill (H.R. 5376) can be found on the following website by clicking here.

If you believe you could benefit from this tax loophole, be sure to contact your Henry+Horne tax advisor with any questions or changes to the bill prior to year-end.

Chris Morrison, CPA