How the US Infrastructure Bill Impacts Cryptocurrency
Senior Accountant Kevin R. Jablonski, CPA
Tobin & Collins
On November 5th, the House of Representatives passed an infrastructure bill including legislation that could create tax issues for those involved in cryptocurrency trading. If signed by President Joe Biden, the bill could result in many cryptocurrency miners being deemed brokers due to an expansion of the definition of a broker under IRS rules. This would require cryptocurrency miners to adhere to additional reporting requirements.
In addition, this bill has legislation that would enact constructive sale rules for cryptocurrency trading. These rules would require crypto-traders to pay attention to wash sale rules when trading, as well as be careful when taking offsetting positions. Wash sales apply to assets sold within 30 days of purchasing an identical asset and prevent investors from taking their loss on this asset as a deduction. Since the wash sale rules would start in 2022 if the bill is passed, a wash sale could occur if an investor sells their cryptocurrency at a loss in early January after purchasing in December of 2021.
Many investors use offsetting positions to decrease their risk on a particular asset. An investor holding both short- and long-term positions on an asset would be required to pay capital gain tax on the long-term position, even if it did not sell yet. To avoid this tax, investors may want to sell one or both of their offsetting positions before year-end.
We will need to wait to see how the IRS and Treasury Department interpret the broad statements in this infrastructure bill. However, there is some good news. There are multiple people in congress, as well as Crypto-exchanges like Coinbase, requesting the Treasury and IRS to specify their regulations and keep them fair and consistent with other tax laws.
Cryptocurrency is still a new and complex market with numerous changes occurring in its tax treatment. With this in mind, we encourage all investors in cryptocurrency to reach out to their tax advisors for updates in the law and advice for year-end tax planning.
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