The IRS laundry sale rule does not currently apply to cryptocurrencies because the IRS considers virtual currencies as well Property instead of Guarantees. In general, a taxpayer who exchanges cryptocurrency for goods, services, or cash, using his basis in the cryptocurrency, must report a gain or loss from the sale or exchange. Cryptocurrencies, stocks, bonds, and other investment holdings are generally capital assets. Capital assets held for more than one year are subject to capital gains tax rates rather than the higher ordinary income tax rates.
Realized losses on capital assets can offset gains on other capital assets. If the price of a capital asset falls below the taxpayer’s basis of the asset, said asset can be sold at a loss, thus “realizing” the loss for income tax purposes. Sophisticated investors learned to sell capital assets strategically at a loss in order to offset gains from sold capital assets valued, or ordinary (subject to restrictions) income; This strategy is referred to as “tax loss harvesting”.
Capital losses harvested must first be applied to offset capital gains, however, if the amount of capital loss exceeds capital gains, it can be used to offset up to $3,000.00 in ordinary income for that tax year. Furthermore, the taxpayer can carry forward losses to subsequent tax years, indefinitely until the loss is exhausted.
In general, the wash-sale rule disallows tax deductions for securities sold at a loss, which are exchanged for the same note, or for “substantially identical” securities within 30 days of the sale (Treasury Regulation Code 1.1091-1(a)). More importantly, the 30-day rule applies both before and after the day of the sale, creating a 61-day window during which the taxpayer cannot purchase the same or “substantially identical” security without sacrificing their harvested loss.
Before the wash-sell rule, a taxpayer could sell a security at a loss, buy back the security immediately (essentially) at the same price, and claim the loss for the capital gain and income. Effectively, the taxpayer maintained the same portfolio position while reaping the tax losses.
By instituting the wash-sale rule, the IRS has added more risk to loss harvesting because the seller cannot buy back within the 61-day window without (essentially) forfeiting the loss deduction, risking the potential appreciation of the security while it’s out of its portfolio.
However, the direct sale rule does not apply to property and, therefore, does not apply to cryptocurrency. Therefore, cryptocurrency, which is defined as property by the IRS and, more generally, as a capital asset in the hands of most taxpayers, can be earned for tax losses without risking the taxpayer’s portfolio position.
This tax loophole is well known by the IRS and Congress has repeatedly made (and fell through) plans to address it. However, despite the Republican Party’s recent refusal to address the cryptocurrency loophole, the fact that cryptocurrency laundering sales are a well-known secret has led many tax preparers to be wary of the consequences of overusing the existing loophole. Therefore, any taxpayer seeking to capture tax losses via their cryptocurrency wallet should consult with a tax professional.
[ad_2]