Offset Crucial Bitcoin Tax While You Can — This Lucrative Loophole Could End in 2022
It may be your last chance to take advantage of one of the most fruitful cryptocurrency tax loopholes available. CNBC reported that a so-called wash sale rule to crypto is being considered for 2022, which in turn could cost bitcoin and other digital coin holders nearly $17 billion, according to an estimate by the Joint Committee on Taxation.
The wash sale rule was designed to discourage investors from selling at a loss to claim a tax benefit. According to the U.S. Securities and Exchange Commission, a wash sale occurs when you sell a security at a loss and then purchase that same security, or “substantially identical” securities, within 30 days before or after the sale.
The House Ways and Means Committee released a summary report saying that they plan to treat crypto more like stocks. CNBC noted that crypto is currently classified as property, so losses on crypto holdings are treated much differently.
Shehan Chandrasekera, head of tax strategy at crypto tax software company CoinTracker.io, said that “one thing savvy investors do is sell at a loss and buy back bitcoin at a lower price” in an attempt to “look as poor as possible.”
He added that investors can take advantage of an unlimited amount of losses and “carry them forward into an unlimited number of tax years.” This is also known as tax-loss harvesting. You can sell investments at a loss to offset any gains realized by selling other securities at a profit. This reduces your tax liability for that year.
Chandrasekera also told CNBC that bookkeeping is essential. “Without detailed records of your transaction and cost basis, you cannot substantiate your calculations to the IRS,” he said.
If this proposal passes, investors have until Dec. 31 to take advantage of the loophole to reduce their 2021 tax bill. The new rule would go into effect on Jan. 1.
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Last updated: September 30, 2021