Capitol Hill continues to impose tax increases on cryptocurrencies.
This time, Chairman Richard Neal (D-Mass.) of the House Ways and Means Committee released text for the tax portion of the budget reconciliation bill, which includes a section that restricts crypto investors from being able to deduct losses on certain transactions.
Section 138153 amends the tax code to specify that foreign currencies, commodities, and digital assets qualify under the Internal Revenue Service’s rules for wash sales. Under current IRS rules, a wash sale occurs when an investor sells “stock or securities” at a loss, and either 30 days before or after the sale, purchases a “substantially identical” stock or security. The IRS prohibits any deduction of losses when a transaction like this occurs.
If this language passes, it will limit crypto investors’ flexibility to deduct losses.
The language drafted by Chairman Neal applies to investors who directly purchase digital assets and investors who purchase derivatives of digital assets (e.g., options and futures contracts).
Additionally, the bill amends statute to capture transactions from a variety of entities. In current statute, the wash rules will apply if an investor were to sell a digital asset and the investor’s spouse subsequently purchased a substantially identical digital asset within the specified timeframe. However, Chairman Neal’s bill expands this so that the wash sale rules also apply to a transaction involving the investor’s dependents; “any individual, corporation, partnership, trust, or estate which controls, or is controlled by” the investor; an IRA, health savings account, or Archer MSA; deferred compensation plan; annuity plan or contract; and a 529 plan.
Democrats are on the warpath when it comes to raising revenue for their monstrosity of a reconciliation bill. This is made clear by their eagerness to reel in revenue by applying wash sale rules to every nook and cranny of an individual’s retirement savings. Democrats do not want individuals to be able to use derivatives, digital assets, or commodities to strengthen their long-term savings, they care more about making sure the government gets its fair share.
On top of restricting deductions on losses, Democrats are also raising the top rate for the capital gains tax from 20 percent to 25 percent. Including the 3.8 percent net investment income tax and the Democrats’ proposed 3 percent surtax, the capital gains tax could be as high as 31.8 percent.
Together these policies will slowly erode individuals’ purchasing power and eliminate any incentive to invest at all.
If enacted, the new application of the IRS’s wash sale rules on digital assets will become effective on January 1, 2022. Unfortunately, without guidance from the IRS, section 138153 of Chairman Neal’s bill could create confusion among investors about what constitutes a “substantially identical” purchase of a digital asset. Additional uncertainty could compel investors to slow trading or stop altogether to avoid any potential punishment from the IRS—creating a chilling effect on transactions within the digital asset industry.
Members of Congress should oppose section 138153 of Chairman Neal’s bill and request its expulsion from the text.