House Democrats recently released details of their highly anticipated tax hike proposal and one of several provisions calls for the application of the blank sale rule to cryptocurrency.

What is the blank sale rule and what would this provision mean for cryptocurrency buyers and sellers if it becomes the law of the land on January 1, 2022?

According to the Securities & Exchange Commission, a wash sale occurs when you sell or trade securities at a loss and in the 30 days before or after the sale, you:

  • Buy substantially identical titles,
  • Acquire substantially identical securities as part of a fully taxable transaction, or
  • Acquire a contract or an option to purchase substantially identical securities.

Internal Revenue Service rules prohibit you from deducting losses from washing sales. For more information on laundry sales, read IRS publication 550, Investment Income and Expenses (including capital gains and losses).

“Applying the wash-sale rules to cryptocurrency would be another obstacle to its widespread use as a convenient medium of exchange,” said Jean-Luc Bourdon, wealth advisor at Lucent Wealth Planning. “By definition, a currency must be generally accepted or used, so I think that also undermines the long-term value of many types of cryptocurrency.”

Other experts note that it will be difficult for cryptocurrency investors to track their buys and sells and avoid breaking the rule of blank selling. On the one hand, coins and tokens are bought on centralized and decentralized platforms that do not track the buying and selling of assets like brokerage and mutual fund companies do.

This means that cryptocurrency buyers and sellers will need to keep track of their base and their adjustments, according to Shehan Chandrasekera, CPA and cryptocurrency tax expert.

However, how investors go about it is a whole different matter.

“It will be virtually impossible to account for washing sales and constructive sales in addition to regular transactions, specific identification and valuation in Excel,” Chandrasekera said. “You will need to use a tool like CoinTracker to track your crypto activity and produce accurate tax reports.”

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