The Biden administration wanted to nix a “special tax subsidy for cryptocurrency,” but it wasn’t in the May 28 debt ceiling bill. Another narrow escape?
Last updated
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 a debt-ceiling deal with Republican lawmakers that would protect crypto traders. The protection the president 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 :
“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 in the U.S., with lawmakers on both sides of the aisle favoring crypto reform legislation.
“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 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.
“It is definitely an issue, as there is some empirical evidence that crypto investors in this strategy,” Omri Marian, professor at the University of California Irvine School of Law, told Cointelegraph. “The President’s 2024 budget proposal that closing this loophole will bring in about $24 billion over 10 years, which is not insignificant.”
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 wouldn’t think it’s massive,” Markus Veith, digital asset practice leader at Grant Thornton, told Cointelegraph, referencing that amount being lost in foregone taxes. Crypto is not yet that impactful to the domestic and global financial services industry. Meanwhile, crypto prices are recovering, “which also begs the question of how many losses are still out there,” said Veith.
“Personally, I would not call someone who engages in legal tax planning a ‘tax cheat,’ even if I do not like their behavior,” said Marian.
Then, too, maybe Biden’s remarks were taken out of context. He may have been talking about two “loopholes” being closed. One was the wash sale rule for crypto, “and the other is like-kind exchanges for real estate investors,” said Goldman, though both align with wealthy investors.
“Those comments [i.e., Biden’s] appear to be more related to the real estate investors. If anything, I am more taken aback by him calling them ‘tax cheats,’” he added.
An accounting firm executive who preferred to remain anonymous told Cointelegraph that he would have thought the U.S. president had more important issues on his plate than crypto wash rules. This was a G7 meeting, though, and on May 16, the European Council had just adopted the world’s first comprehensive set of rules for crypto assets, known as the Markets in Crypto-assets regulations or MiCA. Maybe “that came up in conversation,” and then the discussion shifted to the debt ceiling with crypto still on the president’s mind, the source speculated.
Maybe the U.S. president has a point, however. Perhaps tax-loss harvesting with crypto is an abuse of the U.S. tax system and should be banned.
“It is indeed a problem, in my opinion,” said University of California’s Marian, even if wash trading is currently legal in the U.S. “I don’t see why crypto should have a favorable tax treatment over other investment assets.”
On the other hand, tax loss harvesting and the like didn’t begin with crypto. “Tax planning strategies are much older than the crypto industry, and triggering tax losses to offset income is absolutely something that has been there for a long time,” JJ Schneider, tax reporting and advisory partner at Grant Thornton, told Cointelegraph.
The whole issue could remain problematic until the U.S. determines the actual nature of cryptocurrencies, suggested Goldman:
“The U.S. government struggles with defining what cryptocurrency is. The IRS [Internal Revenue Service] treats it like a capital asset. Other entities treat it like a currency, while others treat it like it’s a security.”
If all entities were to treat cryptocurrency like a currency, “then it may make more sense to follow currency’s rules for wash-sales,” continued Goldman. “However, if it were to go by way of the IRS, then wash sales become potentially problematic.”
The bottom line: One must first define the nature of cryptocurrencies before gauging if their holders are profiting from tax loopholes.
So is more regulatory clarity needed in the U.S., especially if the country hopes to attract institutional investors whose participation might make cryptocurrencies less volatile?
“There’s a big hope that institutional adoption is moving forward,” said Grant Thornton’s Veith. “But with what the industry perceives as lack of clarity, I don’t see that necessarily going up.”
“More guidance is needed,” added Goldman, and cryptocurrencies need to be defined and treated similarly across all financial sectors like taxes, financial reporting, etc.
Marian agreed, but only up to a point. “I do believe there are important areas in which guidance on crypto taxation is needed.” But the claims of uncertainty and lack of guidance are exaggerated, in his view. Marian added:
“For most transactions that most taxpayers engage in, there are relatively clear answers in the law. People simply do not like these answers.”
Nor is the U.S. necessarily the only country that continues to struggle with crypto and taxes. “I think all countries are in the process of figuring out the right tax framework for digital assets,” CoinTracker’s Chandrasekera stated.
Wasn’t it surprising that the U.S. president publicly “crypto traders” with “wealthy tax cheats” in a single sentence — and at a meeting of G7 leaders, no less?
The final debt ceiling legislation resulting from weeks of negotiations on May 28 as the ‘‘Fiscal Responsibility Act of 2023’’ still needs to pass both houses of Congress. But there is no mention at all in the nearly 100-page document of “cryptocurrencies,” “wash rules,” Bitcoin mining or anything remotely crypto-related.
“Yes, one of the victories is blocking proposed taxes,” Republican Representative Warren Davidson of Ohio. Crypto lives to fight another day.
This article first appeared in Cointelegraph, written by