Updated April 2022
Author: Olya Veramchuk, Director of Tax Solutions in Tax & Regulatory Affairs
Ways and Means summary report published yesterday proposed including digital assets into two provisions – wash sales and constructive sales.
Wash sale rules under Section 1091 defer loss recognition in instances where an investor trades a security at a loss, and within 30 days before or after buys a substantially similar security. Instead, the realized loss is added to the cost basis of the new security, thus reducing future capital gains on disposition. Since cryptocurrency and other digital assets are treated as property and not as securities, they are not caught by Section 1091 provisions currently, effectively permitting taxpayers to claim tax losses while retaining an interest in the loss asset.
Constructive sales under Section 1259, also known as “shorting against the box”, prevent an investor from locking in investment gains without paying capital gains tax and require gain recognition with respect to hedged positions. Similarly, because constructive sales rules historically applied to stock, debt, and partnership interest, none of which include crypto assets under the current rules, savvy crypto investors were able to take advantage of the loophole.
If adopted, the rules outlined above would apply to transactions occurring after December 31, 2021.