The ‘GENIUS Loophole’: How To Use the New Crypto Law To Pay Zero Capital Gains
Written by
Lydia Kibet
Edited by
Rebekah Evans
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
If you’ve been scrolling through FinTwit or your favorite investing subreddit lately, you’ve probably seen headlines screaming about a “GENIUS loophole” that lets crypto investors pay zero capital gains. This sounds like a no-brainer, right?
GOBankingRates spoke to finance experts to cut through the noise and what they shared may disappoint many crypto investors. Here’s what experts said is actually going on behind the so-called “GENIUS Act loophole.”
The GENIUS Loophole Doesn’t Actually Exist
Despite online claims, no new crypto-specific law has eliminated capital gains taxes for investors.
“I believe this ‘GENIUS loophole’ phraseology is somewhat misleading,” said Evan Farr, certified elder law attorney at Farr Law Firm. “U.S. tax laws currently treat cryptocurrencies as property. Thus, selling your crypto, exchanging one crypto for another or using your crypto in a transaction where your crypto appreciates is considered a taxable event. And I am not aware of any recent or proposed crypto legislation which has changed this basic premise.”
One source of confusion comes from discussions around a possible de minimis exemption for stablecoins. The idea is to reduce friction when using stablecoins for small, everyday purchases.
However, this doesn’t apply to investing or trading activity. “This exemption would only apply to minor purchases and would not eliminate capital gains tax on investing, trading or cashing out appreciated crypto,” Farr explained.
Old Tax Strategies Are Being Rebranded as New Crypto Loopholes
Another reason the loophole narrative persists is that long-standing tax planning strategies are being repackaged as crypto innovations.
“Long-established tax planning strategies like holding onto assets until death to get a step-up in basis, donating appreciated assets to charity, etcetera, are being re-packaged as ‘new crypto loopholes.’ They are neither new nor specific to cryptocurrency and did not come about due to GENIUS legislation or any similar law,” Farr explained.
Farr also noted that even legitimate capital gains deferral strategies in other areas of the tax code are limited and highly regulated. These include tools like 1031 exchanges, Qualified Opportunity Funds and Delaware Statutory Trusts.
“None of these relate to cryptocurrency and none support the notion that a new law for cryptocurrency allows investors to simply get out of paying capital gains taxes,” he added.
Crypto Rebalancing Can Still Create Taxable Events
“All investment portfolio rebalances create taxable events when done in a taxable account or a health savings account (HSA) in states like California,” said Jason Escamilla, CEO of Impact Advisor. In the case of crypto, if you have a loss, the sale from any rebalance (sell and buy) will cause you to realize the loss as a taxable event or something you report when filing taxes.
With directly-owned crypto, investors can still harvest losses without triggering wash-sale rules that currently apply to stocks and ETFs but not to crypto. However, Escamilla warned this gap may not last forever, as lawmakers in the U.S. Congress have tried to close it.
Editor’s note: GOBankingRates is nonpartisan and strives to cover all aspects of the economy objectively and present balanced reports on politically focused finance stories. You can find more coverage of this topic on GOBankingRates.com.
This article is for informational purposes only and does not constitute financial advice. Investing involves risk, including the possible loss of principal. Always consider your individual circumstances and consult with a qualified financial advisor before making investment decisions.
More From GoBankingRates
