New Bill Aims to Close Crypto Tax 'Loopholes'
Financial recently democrats in the house of representatives proposed legislation to close tax loopholes for cryptocurrency investors, and i use air quotes quite intentionally simply because theres no such thing as a tax loophole. There are simply thousands of pages of tax rules that legislators have decided hey. These are all the tax rules and whenever they come across something that they realize hey, we dont actually like the results of this law that we made were going to call it a tax loophole and then come up with a reason in order to change it, and So in this video were going to talk about what the loophole is that cryptocurrency investors are using what the proposal is to change it and what you can do to avoid this, impacting you ready lets dive in all right. So what is the tax loophole that this bill is proposing to close? Well, if passed, this bill would make cryptocurrency subject to wash sales now things like stocks, mutual funds etfs. These are already subject to the wash sale rule, but because cryptocurrencies are classified as property in the tax code, they are not currently subject to the wash sale rule. So what exactly is a wash sale? Well say: youre, an investor in apple stock and you bought apple stock a couple days ago, because you were really excited about the new lineup of iphones and apple watches that were coming out. But to your disappointment as they announced the new lineup.
They didnt have. As many of the new features as had been rumored – and you just watched the stock price drop during the day as they made their announcements of their new product lineup, so a couple days ago lets say you put one hundred dollars into apple stock after it dropped. You decided to get out and you sold it for ninety dollars. You lost a grand total of ten dollars. Lets, say: thats the only trade you made this year. That would mean that you lost ten dollars. You can use that as a deduction to write off, because you lost that money, so youre not going to have to pay taxes. You earned that 10, but you lost it on that stock trade, and so the irs is going to give you a little bit of a break and say: hey. You dont have to pay us taxes on those ten dollars that you lost. On the other hand, lets say the opposite had happened and the stock went up and you sold it for 110 dollars instead of a hundred dollars. Well, then, you would be subject to capital gains taxes right, so this is very simple right. You sell something for a loss you get to ride out the loss. You sell something for a gain. You have to pay taxes on the gain and if you did both of those trades a couple weeks ago, you made ten dollars and then this week you lost ten dollars.
Theyre gon na net out for the year in total, you had zero dollars, gains zero dollars lost, but heres. Where things get interesting lets say: you bought apple stock a couple days ago and you watched it go down today. You sold and now youre down 10, but you sat back and you thought about it and you realized. You know what i think that theyre gon na still do well for the long term, so i dont really care that they didnt have the exact features set and i think theyre gon na announce, maybe another event in a couple of weeks or a couple of months. Release some new airpods, something like that. I think long term the stocks going to go back up, so you buy back in and lets just say the stock price didnt move at all you bought originally at 100, you sold at 90 bought back in at 90. and yes, im using fake prices for the Stock just to make it easy. Well, now that you bought back in at 90, you no longer get to claim that 10 loss now eventually youll get to take it, but you dont get to take it right now, and this is to prevent people from december 31st selling all their stocks, that they Have a loss in getting to claim those losses and then the very next day buy back in hopefully at a very similar price, and then you get to ride those stocks all the way back up again now.
Ultimately, this is just a scheme so that the irs can squeeze a little bit more out of every trade or an investor, because it doesnt work the opposite way with gains lets say you bought it at 100. It goes up to 110. You sell you made 10, but then you buy immediately back in you dont get to defer those gains. You still have to pay the gains on those ten dollars, so you only get to defer the losses until you eventually sell out of it in the end. So how would that work in practice? You buy it a hundred you sell at 90, you lost 10, but you buy back in at 90.. Now youve got a 10 loss, thats just kind of waiting on the sidelines and your broker will report it theyre going to adjust your cost basis for tax reporting purposes, but its going to just be kind of like held there on the sidelines waiting for you to Eventually sell so lets say a couple months go by, maybe a year goes by and it goes back up to a hundred and you sell well technically on that trade. You had a ten dollar gain right because you bought it 90 and you sold at 100.. But you had an earlier loss that was rolled into that trade that you werent, able to take and now that youve finally sold out of the position you get to. Finally, take that, and so your total reported gain or loss will be zero, because your initial 10 loss was rolled into that position.
You made 10 this time you sold out now that old 10 loss cancels out your new 10 gain. So, in the end, it all works out it all evens out its just a way for the irs to get as much of their profits from you get as much of the squeeze from your wallet now, instead of waiting into the future. Now you might be thinking so does that mean that once i sell something for a loss, i can never buy back in, or else i dont get to ever take my loss. That sounds preposterous. Yes, theres a 30 day window. So as long as you wait 30 days to buy back into the stock, then you will not have to roll that old loss into your new position. Youll still get to take that old loss when it happened and your new position will just carry on like normal. Now, like i said earlier, cryptocurrencies are not subject to the wash sale rule right now, which means that if you sell it today at a loss, you can buy back in immediately and you do not have to claim any wash sale. You dont have to roll those old losses into the new position, but the new proposed legislation would subject cryptocurrency trades to the wash sale rule, meaning that if you sold bitcoin at a loss today – and you bought back in within 30 days, then you would have to Take that loss and roll into the new position you wouldnt be able to claim that loss until you finally sell out and then dont buy back in for another 30 days now.
This would go hand in hand with clamping down on the major exchanges and making sure that these exchanges are reporting things to the irs, especially in light of the new information that came out that the treasury is trying to make the irs collect information from every single Bank account and financial account like a crypto account, or even a brokerage account to uh for reporting every single transaction. As long as the account value total account value is above six hundred dollars, and so as long as they get the information they can enforce. The rules. Like this new wash sale, rule thats being proposed because without all that, information coming in theyre, basically just relying on peoples, voluntary reporting of their own gains or losses which they are currently using, that as an excuse and saying hey, were not getting as much tax revenue. As we would, if people were, you know all reporting it accurately, and so we need to collect the information, so we can enforce it. And last but not least, what can you do to prevent any of these changes from impacting you? Should they go into effect? There are a couple of things you can do. Number one just never sell. You might think this sounds crazy, but i always buy. I never sell bitcoin and the reason is because, if it ever does reach those astronomically high crazy numbers, like 500 000, a million – and you want to take some gains off the table, all you have to do is borrow against it, because debt is not taxable income And so, if it does get up to that those crazy height, you dont have to sell it and incur all these capital gains.
All you have to do is borrow against it. Now. My other rule is only by bitcoin. I do not buy own or trade any other cryptocurrency other than bitcoin, but i know a lot of people do and especially a lot of people. Do it to trade because of the heightened volatility in these markets. Theres big opportunity for disciplined traders to make some decent profits, and so, if the wash sale rule does go into effect and youre no longer able to take advantage of the tax treatment on cryptocurrencies and you cant just buy back into something after you sell it. For a loss, you can always buy a different cryptocurrency that is similar instead see ford and gm are very similar companies, but if you sell for it at a loss and then buy gm youre not subject to the wash sale rule theres a little bit of a Gray area here, but you normally have to buy something thats similar enough to be considered almost identical. So if you uh, sell an s, p, 500 etf and then buy another s, p 500 etf, that is constructed lets, say with the exact same weighting, your brokerage account. Might not recognize that thats a wash sale, but if lets say you ever get audited or something like that, you might be at risk of having to pay penalties on that because that might technically qualify as a wash sale. But as far as individual stocks go and individual cryptocurrencies go, theres, usually enough of a difference between them to be able to make a decent case that they are theyre different enough to not be considered identical securities and then.
Finally, the last thing that you can do to avoid this impacting you is to just buy your cryptocurrency or especially your bitcoin in a self directed ira, because iras are shielded from taxes. The irs does not watch the buying or the selling that takes place underneath the shelter of an ira. They only watch the dollars that go in and the dollars that come out, and so, if you have a self directed ira, i use i trust capital. You can buy gold, silver bitcoin and some other cryptocurrencies inside a self directed ira with itrest capital. Theyve got low fees, a fantastic user interface. I use them. But again you can use something like this. In order to have the wash sale rule not apply to you, you can move between cryptocurrencies you can buy, you can sell, you dont have to worry about the tax reporting whatsoever. I hope that was helpful and, as always, i really appreciate you guys. Thank you.