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The crypto market saw massive gains in 2021. Major cryptocurrencies like Bitcoin, Ethereum, Dogecoin, and others have witnessed institutional and national adoption, which also drove the overall market cap of the crypto industry. Just as blockchain disrupted the traditional ledger technologies, cryptocurrencies like Bitcoin introduced new waves in the fintech and banking spaces by profitably securing decentralized digital currency solutions. While the success rate of the blockchain and crypto industry is growing exponentially, government officials are still concerned about the long-term impacts of cryptocurrencies, given the lack of regulations in this space. Some governments consider cryptos as assets; hence they are subjected to taxes. Similarly, the wash sale rule is one such cryptocurrency tax directive that investors have been able to avoid for years, but soon this might cease to be the case.
Earlier, crypto investors never had to worry about the wash sale rule. But the Internal Revenue Service (IRS) envisions cryptos as properties, which means cryptocurrency investors are subject to the same taxes on capital gains and losses as any other property investor. The Ways and Means Committee of the US Government has jurisdiction over all taxations, tariffs, and other revenue measures. A report published by the committee states that digital currencies are also subjected to the wash sale tax but it is currently not levied upon any cryptocurrency. For years, it has acted as a loophole that has allowed several investors to generate millions of revenues by allowing them to generate tax losses without economically suffering a loss and artificially reducing the tax bill.
A wash sale occurs when an investor trades or sells a stock or security at a loss and then within 30 days before or after the sale, purchases the same or another identical security or stock or acquires a contract or option to do so. Investors use wash sales to minimize tax deductions after selling security in a loss. The IRS is planning on dismissing the deduction of these losses. The committee introduced these rules to discourage taxpayers from abusing tax-loss harvesting by selling an asset just for tax benefits.
Tax-loss harvesting calls for selling a market asset when its value falls below its cost basis to generate capital losses. Even after the implication of the wash sale rule, investors will be able to utilize a tax-loss harvesting strategy with securities to minimize the taxable capital gains. But the phenomenon is different when it comes to cryptocurrency. Currently, the investors are offered more options to use the strategy since the wash sale rules do not apply to digital currencies right now.
Experts believe that closing this loophole does not mean that crypto taxpayers will be completely missing out on the advantages of the tax benefits on wash sale losses. Even though it does not allow the investors to deduct losses on transactions that are considered as wash sales, but they can add disallowed losses to the cost basis of the coin.
Currently, the wash sale rule applies only to stocks and securities, and not to cryptocurrencies. These crypto tax laws apply to those of property, and not with stocks and securities; hence it is still not applicable to crypto transactions.
With the growing popularity of cryptocurrencies, all government agencies are trying to organize the crypto space and levy taxations so that investors can remain secured from scams, and also lawfully invest in these digital assets.
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Disclaimer: Analytics Insight does not provide financial advice or guidance. Also note that the cryptocurrencies mentioned/listed on the website could potentially be scams, i.e. designed to induce you to invest financial resources that may be lost forever and not be recoverable once investments are made. You are responsible for conducting your own research (DYOR) before making any investments. Read more here.
