Biden’s plan to close crypto tax loss loopholes is a step in the right direction
By Andy Lian
President Joe Biden’s proposed budget plan has caused a stir in the crypto community due to its intention to end the harvesting of tax losses on crypto transactions. Reactions from the community have been mixed, with some perceiving this as a violation of the freedom of crypto traders, while others see it as a necessary step to regulate the industry and curb tax evasion.
Tax loss harvesting is a technique used to minimize an individual’s tax liability by deliberately selling an investment at a loss to offset current and/or future capital gains. It reduces the amount of tax one pays to sell profitable investments. Although tax loss harvesting is usually done manually towards the end of the year, a systematic approach that automatically identifies these opportunities and responds to them throughout the year can be more effective, even for fixed income or income-generating securities. This approach enables individuals to reduce their tax liability by deducting the losses from their taxable income. However, this strategy has come under fire for being a loophole that allows wealthy investors to avoid taxes. The end of tax loss harvesting on crypto transactions is estimated to raise up to $24 billion and reduce the deficit by $3 trillion.
Proponents of this proposal argue that it is a compelling measure to promote equity and fairness among taxpayers by ensuring that everyone contributes their fair share. They argue that the current tax system is biased against the wealthy, who are able to exploit various tax loopholes and deductions to lower their tax bills. This ultimately results in middle-class and low-income earners being unfairly burdened with a disproportionately large share of the tax. This imbalance creates an unfair and unequal tax system.
On the other hand, critics of the Biden budget plan argue that ending the harvesting of tax losses on crypto transactions is ill-advised, as it could discourage innovation and investment in the cryptocurrency industry. They argue that this move could cause some investors to move their assets offshore or to other countries with more lenient tax policies, leading to an exodus of talent and capital from the United States. Moreover, they argue that this change could disproportionately affect small and medium-sized businesses that rely on cryptocurrency investment and trading for their expansion and growth.
The tax loss harvesting strategy is often used by investors in the United States as a means of reducing the capital gains tax on their cryptocurrency investments. However, this approach is not widely used in other countries due to differences in tax policies specific to cryptocurrency investments. For example, in Canada, cryptocurrency investments are considered commodities and are thus subject to capital gains tax. Meanwhile, in Australia, profits from cryptocurrency investments are also subject to capital gains tax, with cryptocurrency being property for tax purposes.
In the UK, gains from cryptocurrency investments are taxable under capital gains tax, but it is not possible to use losses to offset other gains. On the other hand, in Germany, cryptocurrency investments held for over one year are exempt from capital gains tax, but those held for less than one year are taxed at the investor’s personal income tax rate. While other countries such as Japan and South Korea have also established tax rules specific to cryptocurrency investments, these guidelines can vary significantly and may be subject to revision over time. Closing the crypto tax loss harvesting loophole can be seen as a step in the right direction towards regulating the cryptocurrency industry and ensuring tax fairness. However, it is important to weigh the potential consequences of this policy change.
To summarize, I believe that closing the cryptocurrency tax loss loophole as proposed in President Biden’s budget plan is not good policy. It can have negative consequences for small investors, innovation and the market as a whole, while not generating significant income for the state. Instead of this approach, I suggest exploring alternative policies that promote growth and innovation in the cryptocurrency industry while ensuring that governments can collect revenue.
The author is an intergovernmental blockchain expert
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