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Congress Mulls Adding Crypto Into 'Anti-abuse' Wash Rule

The U.S. government is again considering tinkering with crypto classifications, and the potential changes being mulled would have major implications regarding future tax liability should they come to fruition.

To that end, the House of Representatives Ways & Means Committee has suggested adding cryptocurrency to the items covered by an “anti-abuse rule” designed to prevent investors from manipulating their tax liability. The “wash rule,” as it is known, prohibits taxpayers from selling securities for a loss only to quickly rebuy them in the hopes they then go up in value once they have enjoyed the write off.

“This section includes commodities, currencies, and digital assets in the wash sale rule, an anti-abuse rule previously applicable to stock and other securities. The wash sale rule in section 1091 prevents taxpayers from claiming tax losses while retaining an interest in the loss asset,” raccording to a report from the committee published last week.

Gary GenslerNotably, Gary Gensler, Chairman of the U.S. Securities and Exchange Commission (SEC), has already made a point to draw a number of parallels between purchasing stock and buying cryptocurrency. Earlier this summer, he said he believes many cryptocurrency tokens are “offered and sold as securities,” and added that rulings from the Supreme Court reaffirm that concept. As such, Gensler has indicated he thinks the SEC should play a significant role in regulating cryptocurrency transactions.

From Twitter

Sam Jones @heysamjones

"Will somebody please explain to the ways and means committee that if you add the wash sale rules to cryptocurrency it becomes basically impossible to track basis for any L1 not supported by tax software because every coin conversion (ie NFTs and defi) is multiple buys and sells"

Presently, the Internal Revenue Service (IRS) treats virtual currencies as “property” with respect to federal tax law. According to the government agency, “General tax principles applicable to property transactions apply to transactions using virtual currency.”

As far as how the “wash rule” is applied now, taxpayers are prohibited from claiming a loss from selling stocks and other securities if they reacquire “substantially identical stock or securities” within 30 days of that sale, according to an explanation from the Legal Information Institute. In such instances, “no deduction shall be allowed under section 165 unless the taxpayer is a dealer in stock or securities and the loss is sustained in a transaction made in the ordinary course of such business,” it adds.

The Ways & Means Committee is suggesting the “wash rule” governance be expanded to cover digital assets in tax years coming after Wednesday, Dec. 31, 2021. Additionally, Rep. Richard Neal, the chairman of the Ways & Means Committee, addressed a number of other topics with respect to the tax code as the committee contemplates its budget reconciliation responsibilities. Among some of the areas Neal touched upon include infrastructure, energy, healthcare and how American tax law impacts the global economy.

“Finally, we take very seriously that no matter how well-designed our tax law is, it will mean little if the IRS doesn’t have the resources to enforce it. To that end, we propose a long-overdue investment in the technology and human capital needed for complex audits,” he concluded his address.

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