Bitcoin has digitized the transfer of value at the speed of the internet. Yet such technological leaps tend to temporarily overload a bureaucracy’s ability to keep up with regulations, laws and taxation.
Currently, the IRS designates bitcoin as “property” rather than currency, and characterizes the sale of bitcoin in terms of capital gains and losses, rather than ordinary income. As such, the “Wash Sale Rule” does not appear to apply to sales of bitcoin. Lacking guidance from the U.S. Department of the Treasury or the IRS to the contrary, Bitcoiners can potentially benefit from this loophole that takes advantage of fluctuations of value.
How Bitcoin Investors Benefit From The “Wash Sale Rule”
A wash sale is when a security is sold at a loss, but then the same security or “substantially identical security” is purchased within 30 days of the sale. If this were to happen with securities or stock, taxpayers can’t use a capital loss from this transaction. But since bitcoin is treated as property, and not considered a security, it is not subject to wash sale rules.
An investor can sell and quickly rebuy bitcoin to catch any price rebound. This strategy, often referred to as “tax loss harvesting,” can be a valuable advantage for tax purposes if one is looking to use a loss to reduce or eliminate capital gains taxes (and, to a limited extent, income tax).
But taking advantage of harvesting capital losses may be easier said than done. While tracking the potentially taxable activity and fair market value of bitcoin may be easier on an exchange that provides transaction reports, many prefer to move their bitcoin to private wallets or have bitcoin in more than one place. Careful tracking is still necessary, even if one’s bitcoin is not on an exchange. Obviously, those that don’t sell their bitcoin and people in low tax brackets that don’t pay long-term capital gains would not benefit from this loophole.
Bitcoin Tax Advantages Versus The State
As the most recent infrastructure legislation being considered in the U.S. Congress shows us, Bitcoin is being targeted for aggressive taxation and oversight to help prop up the current economic system. The IRS has already started scrutinizing transactions more carefully in an effort to ensure tax compliance. As a result, overzealous application of the benefits of the wash rule loophole is more likely to attract unwanted attention.
For example, it is unlikely that the IRS would consider selling to obtain a loophole benefit and then repurchasing one’s bitcoin a second or two later as a valid transaction. The IRS generally wants to see that an investor takes some risk to consider the sale legitimate. Until new regulations or case law make this more clear, it’s better to be safe than sorry as the IRS could negate this as a sham transaction, causing a taxable hot mess.
While the Bitcoin wash rule loophole exists now, it may not in the near future. Although the current infrastructure bill doesn’t address this, the current trend toward taxation in general suggests the U.S. Congress will amend the wash sales rule to include bitcoin in the near future. In general, a reasoned approach by a tax professional in utilizing tax loopholes for one’s benefit, is far better than a blasé, catch-me-if-you-can attitude towards taxation.
This is a guest post by SJ Ware. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
Bitcoin has digitized the switch of worth on the pace of the web. But such technological leaps are likely to briefly overload a paperwork’s skill to maintain up with rules, legal guidelines and taxation.
Presently, the IRS designates bitcoin as “property” somewhat than forex, and characterizes the sale of bitcoin when it comes to capital positive factors and losses, somewhat than strange revenue. As such, the “Wash Sale Rule” doesn’t seem to use to gross sales of bitcoin. Missing steerage from the U.S. Division of the Treasury or the IRS on the contrary, Bitcoiners can probably profit from this loophole that takes benefit of fluctuations of worth.
How Bitcoin Traders Profit From The “Wash Sale Rule”
A wash sale is when a safety is bought at a loss, however then the identical safety or “considerably similar safety” is bought inside 30 days of the sale. If this have been to occur with securities or inventory, taxpayers can’t use a capital loss from this transaction. However since bitcoin is handled as property, and never thought of a safety, it’s not topic to clean sale guidelines.
An investor can promote and rapidly rebuy bitcoin to catch any value rebound. This technique, sometimes called “tax loss harvesting,” is usually a helpful benefit for tax functions if one is wanting to make use of a loss to scale back or remove capital positive factors taxes (and, to a restricted extent, revenue tax).
However benefiting from harvesting capital losses could also be simpler stated than completed. Whereas monitoring the possibly taxable exercise and honest market worth of bitcoin could also be simpler on an trade that gives transaction studies, many choose to maneuver their bitcoin to personal wallets or have bitcoin in a couple of place. Cautious monitoring remains to be crucial, even when one’s bitcoin shouldn’t be on an trade. Clearly, those who don’t promote their bitcoin and folks in low tax brackets that don’t pay long-term capital positive factors wouldn’t profit from this loophole.
Bitcoin Tax Benefits Versus The State
As the latest infrastructure laws being thought of within the U.S. Congress reveals us, Bitcoin is being focused for aggressive taxation and oversight to assist prop up the present financial system. The IRS has already began scrutinizing transactions extra rigorously in an effort to make sure tax compliance. Consequently, overzealous utility of the advantages of the wash rule loophole is extra prone to appeal to undesirable consideration.
For instance, it’s unlikely that the IRS would take into account promoting to acquire a loophole profit after which repurchasing one’s bitcoin a second or two later as a legitimate transaction. The IRS typically needs to see that an investor takes some danger to contemplate the sale respectable. Till new rules or case regulation make this extra clear, it’s higher to be protected than sorry because the IRS might negate this as a sham transaction, inflicting a taxable sizzling mess.
Whereas the Bitcoin wash rule loophole exists now, it might not within the close to future. Though the present infrastructure invoice doesn’t handle this, the present development towards taxation typically suggests the U.S. Congress will amend the wash gross sales rule to incorporate bitcoin within the close to future. Usually, a reasoned strategy by a tax skilled in using tax loopholes for one’s profit, is much better than a blasé, catch-me-if-you-can angle in direction of taxation.
It is a visitor submit by SJ Ware. Opinions expressed are fully their very own and don’t essentially replicate these of BTC Inc or Bitcoin Journal.