House Democrats recently released details of their eagerly-awaited tax increase proposal and one of the many provisions calls for the application of the wash-sale rule to cryptocurrency.
What’s the wash-sale rule and what would this provision mean for buyers and sellers of cryptocurrency if it becomes the law of the land on Jan. 1, 2022?
According to the Securities & Exchange Commission, a wash sale occurs when you sell or trade securities at a loss and within 30 days before or after the sale you:
- Buy substantially identical securities,
- Acquire substantially identical securities in a fully-taxable trade, or
- Acquire a contract or option to buy substantially identical securities.
Internal Revenue Service rules prohibit you from deducting losses related to wash sales. For more information about wash sales, read IRS Publication 550, Investment Income and Expenses (including capital gains and losses).
“The application of the wash-sale rules to cryptocurrency would be one more obstacle to its widespread use as a practical medium of exchange,” said Jean-Luc Bourdon, a wealth adviser with Lucent Wealth Planning. “By definition, a currency must be generally accepted or in use, so I think this also undermines the long-term value of many types of cryptocurrencies.”
Other experts note that it will be difficult for cryptocurrency investors to keep track of their purchases and sales and avoid violating the wash-sale rule. For one, coins and tokens are purchased on centralized and decentralized platforms that don’t keep track of the purchase and sale of assets as do brokerage and mutual fund firms.
That means buyers and sellers of cryptocurrency will have to keep track of their basis and adjustments, according to Shehan Chandrasekera, a CPA and expert on cryptocurrency taxes.
How investors will go about that is an entirely different matter, though.
“It will be virtually impossible to account for wash sales and constructive sales in addition to regular trades, specific identification and valuation on Excel,” said Chandrasekera. “You will have to use a tool like CoinTracker to track your crypto activity and produce accurate tax reports.”