The crypto sector appears to have dodged another bullet. At the time of publication, the United States has reached a political agreement to raise its
The crypto sector appears to have dodged another bullet. At the time of publication, the United States has reached a political agreement to raise its debt ceiling, avoiding a calamitous default on its obligations, and this resolution probably won’t include any new taxes on cryptocurrencies.
But that doesn’t mean the question of U.S. crypto taxation is settled. The debate is likely to continue and may be transformed into something more partisan than previously assumed.
To recap: On May 21, at the Group of Seven (G7) Summit in Hiroshima, Japan, U.S. President Joseph Biden spoke out against a debt-ceiling deal with Republican lawmakers that would protect crypto traders. The protection the president referenced was tax-loss harvesting, a tax minimization strategy legal in the U.S., but viewed by many as a loophole.
However, it was the phrasing of the president’s remarks as much as their content that drew attention. Biden said:
“And I’m not going to agree to a deal that protects wealthy tax cheats and crypto traders while putting food assistance at risk for nearly a hundred — excuse me — nearly 1 million Americans.”
It’s not every day that a U.S. president speaks out about cryptocurrencies — let alone from a high-level international conclave — so Biden’s choice of words may be worth examining. He seemed to equate “crypto traders” with “wealthy tax cheats.” If so, it might suggest that crypto support may now be breaking more along Democrat/Republican lines than was earlier presumed.
This also raises some questions: Is tax-loss harvesting with cryptocurrencies a loophole in the U.S. tax system that should be closed? Would investors or traders even miss it if it were eliminated?
On a more political level, was it surprising to hear a U.S. president grouping “crypto traders” with “wealthy tax cheats” in a single phrase? One has heard many claims recently that crypto and blockchain have no party affiliation in the U.S., with lawmakers on both sides of the aisle favoring crypto reform legislation.
Is tax loss harvesting widely used by U.S. crypto investors?
“Tax-loss harvesting is an important tool for cryptocurrency investors for two key reasons,” Nathan Goldman, associate professor at North Carolina State University’s Poole College of Management, told Cointelegraph.
First, cryptocurrencies’ prices are more volatile than traditional securities, like equities. For example, General Electric’s stock traded at $74 at the end of 2021 and $66 at the end of 2022. During the same period, Bitcoin (BTC) tumbled from around $47,000 to nearly $16,000. Goldman noted:
“Given the dramatic ups and downs, there is ample opportunity for investors to sell during the down periods, creating a tax loss that can be used to offset another gain — also known as tax-loss harvesting.”
The second reason for the strategy’s popularity with crypto investors is that it isn’t subject to wash sale rules. With most securities, “tax-loss harvesting carries the penalty that the taxpayer cannot repurchase the security for 30 days — often referred to as ‘wash sale rules,’” explained Goldman. During that time, the stock might increase in value, which the investor would not recognize. “However, cryptocurrency does not have those rules.”
“This rule — or lack thereof — has a lot of important tax considerations, and, thus, many investors are likely making use of it,” said Goldman.
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“It is definitely an issue, as there is some empirical evidence that crypto investors engage in this strategy,” Omri Marian, professor at the University of California Irvine School of Law, told Cointelegraph. “The President’s 2024 budget proposal estimates that closing this loophole will bring in about $24 billion over 10 years, which is not insignificant.”
According to a March 2023 White House statement explaining the Administration’s 2024 budget proposal:
“The Budget saves $24 billion by eliminating a special tax subsidy for crypto currency and certain other transactions. Right now, crypto investors aren’t subject to the same rules of the road that investors in stocks or other securities have to follow, allowing them to report excessive losses. […] The Budget eliminates this tax subsidy for crypto currencies by modernizing the tax code’s anti-abuse rules to apply to crypto assets just like they apply to stocks and other securities.”
However, not everyone agrees that tax loss harvesting is rampant or will add much to government coffers if the “loophole” is closed. “Crypto not being subject to the wash sale rule is a loophole in the system,” Shehan Chandrasekera, head of tax strategy at CoinTracker, told Cointelegraph. “That said, I don’t think the government is losing billions of dollars from that. This is because crypto is still a small segment of the economy.”
“From a pure volume perspective, I…
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