© Courtesy of Forbes A glimpse of women using NFT smartphone investment portfolios on City Street, GettyCryptocurrency taxes are back in the news. On Tuesday, President Joe Biden tweeted a chart suggesting that Congress should close “a tax loophole that helps wealthy cryptocurrency investors ($18 billion).
His language left the industry scratching its head: What's the $18 billion difference?
The White House has not specified where the dollar figure came from, but it is likely related to collecting tax losses along with sales of laundry.
collect taxes
It's possible for you to lose your taxes without even knowing you did. The concept is simple: selling an underperforming or losing asset, such as a stock that has lost value, to compound losses to offset gains on an appreciating asset. Selling loss-making stock or other investments to recoup the gains of winners is called pooling.
The rules can be complex, but losses are usually used to offset gains of the same type (short-term gains with short-term losses, long-term gains with long-term losses). But if one type of loss outweighs your gains of the same type, you may be able to apply that to another. And if your capital losses over the year exceed your capital gains, you can deduct a net loss of up to $3,000 from your total annual income. In addition, losses can be carried over to future tax years.
Laundry sales
For tax purposes, a laundering sale occurs when you sell or trade stock or securities at a loss and then, within 30 days before or after the sale, buy or repurchase substantially identical stock or securities.
Stock or address that is almost exactly the same as the name. You have a wash sale when you sell a stock or bond and then buy the exact same stock or bond. You can also end up with a net sale if you sell stock or securities and purchase stock or securities of a related company, including a predecessor or successor company, as part of a reorganization. The wash sale rule also applies to losses arising from the transfer or exchange of contracts and options to buy or sell stock or securities. Generally, the IRS looks at facts and circumstances to determine whether a stock or security is "physically identical."
because it matters? Most taxpayers can't deduct sales or inventory losses in the laundry sale process, which makes collecting any tax resulting from the sale of laundry in that tax year meaningless. Even if you miss out on a discount, it's not so bad: You can add the amount of the loss to the base cost of your inventory or replacement security, which will come in handy later.
There are no laundry sales for Crypto
Laundry sales rules do not apply to all items. This does not apply, for example, to losses resulting from the sale or exchange of commodity or foreign currency futures. They, in particular, do not apply to digital assets. This is because digital assets, including cryptocurrencies, do not meet the statutory or regulatory definition of a stock or security.
You can already see where this is taking us. If you can balance gains with losses, it can be tax efficient. And without the fake selling rule, if you own a losing asset, you can sell it cheap to capitalize on the loss and come back and buy it again.
an offer
This may change. President Biden's proposed budget for fiscal 2024 includes a proposal to comply with digital asset sales rules, with the aim of "closing the loopholes that would benefit wealthy cryptocurrency investors."
Specifically, the proposal will require that “the same rules for recognizing losses apply to digital assets held as investments or for business purposes as they apply to stocks and securities.” The term "digital asset" broadly means "any digital representation of value recorded in a cryptographically distributed ledger or similar technology designated by a secretary."
If you think you've heard this before, you're not wrong. The Better Rebuilding Bill 2021 includes a similar provision that is not included in the Alternative Inflation Reducing Act.
If the rules are signed into law, they will take effect in 2024. The administration estimates the changes will be $1.24 billion net in 2024 and $8.97 billion over the next five years. From 2024 to 2033, revenue growth is expected to be $23.52 billion.
(The budget also includes a bonus for cryptocurrency energy consumption. You can learn more here.)
The question is $18 million
Still not $18 million. So where did he come from?
A 2022 National Bureau of Economic Research (NBER) working paper found that increased cryptocurrency censorship has fueled the market. Specifically, they find that "domestic traders in particular increased their tax harvest as a result of increased tax controls, and US stock exchanges exhibit significantly more fraudulent trading." This is because, as mentioned above, cryptocurrencies are easy to download, lose (used to offset gains), and then quickly recover.
For the 2018 fiscal year, assuming a 30% tax rate, the authors of the article estimate that lost tax revenue due to no bath salts rule would be between $10.02 billion and $16.2 billion. Of course, there has never been a 30% rate in the United States. In 2018, as it is today, the tax rates were 0%, 12%, 22%, 24%, 32%, 35%, and 37%, but be aware.
The model is good, but I don't know if anyone can say for sure how much revenue can be generated by applying the rule of selling cryptocurrency to sales, although I think we can all agree that it is important.
More important question? If a motion is passed in the current Congress. It remains to be seen.