US Democratic Lawmakers Introduce Bill to Close Tax Loophole Used by Crypto Investors

US Democratic Lawmakers Introduce Bill to Close Tax Loophole Used by Crypto Investors

• The plan of the House’s Democratic lawmakers’ is to impose the same trading rules on cryptocurrencies that apply to stocks and bonds on the stock market.
• If the bill is passed, investors in Bitcoin, ethereum and other digital currencies would lose the current benefits offered by the lack of regulations.

The bill, proposed on Monday 13th by Democratic lawmakers in the US House of Representatives, seeks to impose “wash sale” rules related to cryptocurrencies, commodities and digital assets.

This follows a memorandum released by the Ways and Means Committee of the House. The legislation aims to close the current existing tax loophole, which benefits cryptocurrency investors in the country.

In other words, Bitcoin, Ethereum, Cardano and other digital currencies, would have to submit to the same rules against abuse that apply to stocks, bonds and other securities on the market.

Losses in the crypto market are treated differently from those in stocks and mutual funds. Precisely because the so-called ‘wash sales’ rules are not applied to this market, according to the opinion of financial experts.

Wash sales rules prevent investors from manipulating the stock market. Currently, crypto investors can get two types of tax benefits after losing investment. One is to use the loss to decrease or eliminate capital gains tax on positive investments. The other is to immediately buy back the same asset that was sold, pending subsequent recovery in the price of the asset.

On The Flipside

• This tax loophole, which benefits cryptocurrency investors, exists due to the lack of regulation in the U.S.
• The U.S Internal Revenue Service (IRS) considers cryptocurrencies to be property, and not security. It is for this reason that crypto assets do not fall under the wash sale rule.

Unlike what happens with digital assets, shareholders cannot buy the same or similar value in a 30-day period before and after selling an asset. Otherwise, they expose themselves to sanctions by the United States Securities and Exchange Commission (SEC).

If approved as presented by the House Democrats, the rule would apply to all cryptocurrency sales after December 31st of this year.

This attempt to regulate the market isn’t being made solely in search of clear and equal rules for all types of assets and securities. It is also that the application of the clean sale rules on cryptocurrencies and other digital assets would allow the Biden administration to raise a little more than $16.8 billion over the next 10 years, according to the opinion of the Joint Tax Committee.

A New Option for Investors

This new rule is being proposed in addition to other tax reforms that Democratic lawmakers have proposed to increase revenue. The White House will make million-dollar investments aiming to curb climate change, make changes in infrastructure, and in the expansion of the social safety net, the cost of which is estimated to be $3.5 trillion.

In the case that cryptocurrencies become subject to wash sale rules, there is an option for investors. They can still place positions in another digital asset without any problems.

This is recommended by the founder of Delancey Wealth Management, Ivory Johnson. Speaking to CNBC, the financial planner said that cryptocurrencies are different from each other. So selling Bitcoin, and buying Etherum quickly afterwards is probably not a violation of the rules.

According to Johnson, “the similarities begin and end with the currencies that are exchanged on a blockchain.” It states that “using that logic, stocks traded on an exchange, NYSE or otherwise, are not considered and one and the same either.”

The expert made the analogy that “bitcoin is to ether what Gold is to Visa (NYSE:V) – they are not ‘substantially similar.'” Therefore, they should not activate the wash sale rule.

Why You Should Care?

• The debate around cryptocurrencies, their intrinsic value as a payment instrument, their potential tax contribution and growing use, continues every day in high political circles in Washington.
• The noise around whether or not to accept crypto assets has ceased, and the discussions now revolve around their benefits, network security and control.

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