Biden’s Tax Hike Proposal and What It Means for Bitcoin ‘Wash Sale’

President Joe Biden yesterday fell a budget plan of 6.9 trillion dollars. The massive plan — which is expected to be rejected in the GOP-controlled House — wants to raise taxes on the wealthy and corporations to reduce a massive deficit.

And that includes crypto traders and investors. The document says it wants to close “the loophole that benefits wealthy crypto investors” by focusing on wash sales of digital assets. So what will it mean for the average crypto investor if this ambitious proposal is passed?

The proposal says it wants to “modernize rules, including those for digital assets” and “apply the wash sale rules to digital assets and address related party transactions,” essentially making cryptoassets comply with the same rules as more traditional investments.

A wash sale is when someone sells a security at a loss, then buys the same asset with the hope that it will later go back up in value within a 30-day window. In other words, an investor can realize a loss on an asset on paper, and secure a tax break for the asset sold, but still later benefit from potential gains on the same asset.

Investors are currently unable to create an investment loss for tax deductions while still holding a position in a security. However, until now, this rule has not been applicable to crypto-assets, which has allowed crypto-investors to use tax-loss strategies that are not available to traditional investors.

For example, investors can now take advantage of buying Bitcoin for $20,000. If it then falls to $17,500 and then sell it, they can realize the loss on paper for tax purposes – but immediately buy more Bitcoin to continue to have a stake in the asset .

“Wash selling is when you sell something, but you buy something identical to something you sold,” said CoinTracker chief strategy officer Shehan Chandrasekera Decrypt. “But what happens if you sell Bitcoin but buy back something like Wrapped Bitcoin – it’s not identical – that’s where things can get complicated.”

Wrapped Bitcoin (WBTC) is a token that allows traders who want to use their Bitcoin holdings in the Ethereum ecosystem. It trades at the same price as Bitcoin, but runs on a different blockchain.

There are many different “wrapped tokens”, but none are mentioned in Biden’s proposal.

Director of Government Solutions at TaxBit Miles Fuller said Decrypt that the elimination of tax loss harvesting could reduce the burden on taxpayers to calculate taxes, as fewer transactions would have to be sorted. But the burden would then fall on exchanges.

“The burden on exchanges to track transactions that fall within the wash sale rule and ensure they are ignored for tax purposes will increase,” he said, but added that software could help solve the problem.

So far, the proposal has not been adopted – and is likely to face obstacles in Congress. But it is certain that the authorities are following digital assets more closely – and want to regulate them like other investments.