US Crypto Tax Loss Harvesters Make Hay While the Sun Shines – But the Clock’s Ticking

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American crypto investors are exploiting two key loopholes for the “tax loss harvest,” but experts have warned that lawmakers are wise to them – and are already trying to close them before the year is out.

As previously reported, some Democratic members of Congress have become aware of the fact that crypto traders are allowed to write off their losses by selling tokens at lower prices – and only buy the same type of coin again within the next 30 days. In addition, some traders try to buy offsetting positions to avoid having to file capital gains declarations.

CNBC quoted Shehan Chandrasekera, head of tax strategy at crypto tax software firm Coin Tracker, as saying that “savvy investors” are currently “selling at a loss and buying back Bitcoin (BTC) at a lower price” in an attempt” to look as poor as possible.”

He said:

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

Chandrasekera said, that the status quo allows investors to “calculate an unlimited number of losses” and “transfer them to an unlimited number of tax years.”

But those who take advantage of the loophole will keep an eye on the Ways and Means Committee of Congress, which has submitted a proposal for a change in the law, bundled with a number of other tax changes.

Of so-called constructive sales, the committee wrote that “digital assets” “should be included in the constructive rules of sale, anti-abuse rules that previously apply to other financial assets,” adding:

“The constructive rules of sale [.] Treat the acceptance of certain transfer positions to previously owned positions as sales of the previously owned position. These rules prevent taxpayers from blocking investment profits without realizing taxable profit.”

And on “Wash Sales,” they wrote about the need to include “digital assets in the Wash Sale Rule,” which they called an “anti-abuse rule” that previously applied to stocks and other securities.”

The committee continued:

“The wash-sale rule [.] Prevents taxable persons from claiming tax losses, while you keep a share of the loss assets.”

Previous calculations by the Washington Post showed that the government could earn up to $16 billion in tax revenue if rule changes are introduced as planned.

The Joint Committee on Taxation is even more optimistic and, according to its own calculations, expects USD 17 billion.

However, in a piece for Forbes, Chandrasekera argued that there could still be opportunities for traders in the United States to perform some forms of tax loss harvesting for constructive sales, provided they got their timing and calculations right.

But he warned: “It is your responsibility to track constructive sales, adjust the cost base and report profits if necessary”, since exchanges “do not report constructive sales in their transaction history reports” and such transactions also do not appear “on the upcoming 1099-B FORMS.”

Chandrasekera concluded with a warning:

“When this rule is enacted, along with the Wash Sale rule, will significantly increase the administrative burden for cryptocurrency taxpayers.”

The authors of the Ways and Means Committee wrote that the proposed changes would apply to “taxable years beginning after December 31, 2021.”