Crypto Tax Loophole

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Disclaimer: FAS Bookkeeping and Tax Services is providing this article as a public educational piece. 
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FAS Bookkeeping and Tax Services will not be held liable for any damages incurred by using the specific products mentioned in the article.

Crypto Tax Loophole

Crypto Tax Loophole

Congress through the House Ways and means Committee is planning on plugging one of the most gaping and lucrative crypto tax loophole. If the Committee succeeds with its plan, it could cost Bitcoin and other Cryptocurrency holders approximately $17 Billion Dollars. The estimate was made by the Joint Committee on Taxation.

 

According to a summary report made by the committee. The proposed bill would apply the so-called wash sale rule to digital assets, effectively treating them like stocks. The rule will force an investor to wait 30 days between the selling of a security and repurchasing it when a tax deduction is involved.

 

If the proposal passes the floor, taxpayers have until December 31, to take full advantage of the loophole. The loophole that lets crypto investors sell coins at a loss for tax purposes and immediately buy them back. The recent plunge in crypto prices makes the timing perfect for tax-loss harvesting.

 

Where does the IRS stand?

 

Currently, the IRS classifies cryptocurrencies like bitcoin as property. This means that losses on crypto holdings are treated very differently than stocks and mutual funds.

As for the crypto tax loophole; Shehan Chandrasekera, head of tax strategy at crypto tax software company CoinTracker.io has this to say:

“One thing savvy investor do is sell at a loss and buy back bitcoin at a lower price” “You want to look as poor as possible”

The bigger the market for cryptocurrencies, the more crypto tax loophole is to occur.

“I see people doing this every moth, every week, every quarter, depending on their sophistication” Chandrasekera said.

Cryptocurrency is known for being volatile, coming with steep drops often followed by rapid spiks. Quickly buying back the cryptos is another key part of the equation. If timed perfectly, buying the dip enables investors to catch the ride back up, if there is a rebound to be expected.

Chandrasekera said it’s a popular strategy among his company’s clients, but he cautioned that thorough bookkeeping is critical.

“Without detailed records of your transaction and cost basis, you cannot substantiate your calculations to the IRS,” said Chandrasekera.

 

Read here to know more about Blockchain-based Bookkeeping!

 

What changes will happen?

The crypto tax loophole is expected to be plugged by January 1. But for it to be finalized, it has to be included in legislation that passes the House and the Senate.

Chandrasekera is betting that the rule makes it into the final bill because it aligns with crypto being treated as a security subject to 1099-B reporting, like other investments, he said.

 

But as it’s written, the rule would not be applied retroactively, so crypto investors have a window available to take advantage of asset sales.

 

Time is running and bookkeeping is a vital part of this strategy to work. If you are into cryptocurrency investment, make sure you have reliable records to support your tax reporting at year-end.

Get in touch with us today!

 

Disclaimer: FAS Bookkeeping and Tax Services is providing this article as a public educational piece. 
Reference to any specific product or entity does not constitute an endorsement or recommendation by FAS Bookkeeping and Tax Services. 
FAS Bookkeeping and Tax Services will not be held liable for any damages incurred by using the specific products mentioned in the article.

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