Lagging updates to the law allow cryptocurrency traders to capitalize on a unique benefit. Generally, if a taxpayer sells a losing investment and then reacquires a substantially identical position within 30 days, the loss is disallowed. This is known as the wash loss rule.
Currently, the wash loss rule does not apply to cryptocurrency transactions. This means a taxpayer can sell a losing position, harvest the loss, and then reacquire the same position without waiting the 30 days required for a wash loss.
However, traders must also be aware of the economic substance doctrine. This provision says a taxpayer can not engage in a transaction solely for the tax benefit. For the taxpayer, this means they likely cannot reacquire a position immediately, but must wait long enough to expose themselves to some level of substantial market risk.
Finally, it must be noted that the Build Back Better Act, or BBBA, as passed by the House would add digital assets to the wash loss rule. If this becomes law, taxpayers would need to wait the full 30 days to reacquire a losing crypto position. As a result, December 2021 may be the last opportunity for crypto traders to bypass this waiting period.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Matt Metras, EA, is the owner of MDM Financial Services in Rochester, N.Y., a firm specializing in cryptocurrency tax. He frequently teaches continuing education and writes on crypto for several national organizations. Matt is also a passionate community advocate and serves on his local board of education.
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