Build Back Better Act would close tax loophole for crypto investors

Proposed legislation unveiled Thursday as part of Democrats’ $1.75 trillion social and climate spending plan would close a tax loophole for cryptocurrency investors.

The Build Back Better Act would subject crypto transactions to “wash sale” rules, an anti-abuse measure that currently applies to stocks, bonds and other securities, according to an outline published by the House Rules Committee.

As a result, bitcoin, ethereum, dogecoin and other crypto would be subject to the rules. They prevent investors from claiming tax benefits from an investment loss then quickly buying back that same asset, effectively retaining ownership.

The new proposal would apply after Dec. 31.

The Rules Committee proposed its near-final legislative draft after the White House unveiled a policy framework Thursday morning, the result of months of negotiations among moderate and progressive Democrats.

The legislation may still evolve and its success isn’t guaranteed. Democrats need nearly full party support in both chambers for the measure to pass, given unified Republican opposition. Key holdouts haven’t publicly committed to voting for it.

A House Ways and Means Committee tax proposal last month also sought to subject digital currencies to wash sales.

The IRS treats crypto as property, not as a security, which is how the asset class escapes wash sale rules under present law.

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Crypto investors reap two benefits as a result: They can sell crypto for a loss and claim a tax benefit. (They can use the loss to reduce or eliminate capital-gains taxes owed on winning investments in their portfolio.) Then, they can quickly buy back the crypto they sold to capture any rebound in price — which isn’t far-fetched given crypto’s volatility.

By comparison, stock investors aren’t allowed to buy an identical or similar security within 30 days before or 30 days after a sale without triggering penalties.

The measure is among a series of tax reforms that would raise almost $2 trillion for climate investments and a significant widening of the U.S. social safety net, including universal preschool, health-care expansions and financial assistance for child care.

Subjecting crypto and other assets to wash sale rules would raise $16.8 billion over a decade, according to estimates published last month by the Joint Committee on Taxation.

If crypto is ultimately subject to wash-sale rules, investors may be able to speedily establish positions in a different coin without getting tripped up.

Cryptocurrencies are dissimilar enough that selling bitcoin and then quickly buying etherum, for example, likely wouldn’t violate the rules, according to Ivory Johnson, a certified financial planner and founder of Delancey Wealth Management in Washington, D.C.

“The similarities start and end with the coins being exchanged on a blockchain,” Johnson has told CNBC. “Using that logic, stocks traded on an exchange, NYSE or otherwise, are not considered one and the same either.”