Big Changes for the Crypto World Part 2: How the Proposed Provisions in the Build Back Better Act will Impact Cryptocurrency
November 16, 2021
At a glance
- The main takeaway: The Build Back Better Act continues to be debated by the Senate. This bill also has some major provisions which have the crypto world buzzing.
- Impact on you and your business: Those who deal in cryptocurrency could lose the ability to skirt the Wash and Constructive Sale Rules if this bill is enacted as written today. These provisions could take effect immediately upon becoming law.
- Next steps: Work with Aprio’s experts who are well-versed in the accounting requirements of the technology and blockchain space to start preparing for these changes now.
The full story:
The proposed Build Back Better Act (BBBA) includes legislative text that will have significant impacts on the cryptocurrency world. There are two huge provisions within this act which will transform how gains and losses are managed in the world of investing in digital assets.
Wash Sale Rules:
During 2021 we saw most digital assets rise and then drop by 50 percent, and since then many have risen back to those earlier levels and even higher.
During the period of the drop, many clients were asking, “Can I sell my bitcoin and create a capital loss, then buy the same asset back with a lower cost basis?”
While the original thought, was that the loss would be trapped and unusable because of the wash sale rules, we soon realized that the wash sale rules did not apply to these transactions.
One of the provisions in this pending legislation is a law change that clarifies that digital asset transactions will be subject to the wash sale rules, which all securities are subject to.
This provision under the proposed legislation would go into effect immediately upon the act being signed into law. So if you have positions you want to take advantage of wash sale rules not applying, you may want to consider selling now.
The IRS projects that this change will raise $16.672 billion in taxes over the next 10 years. If the IRS is forecasting this, they must be forecasting more wild rides in the crypto markets rising and falling and rising again, like it has in 2021.
Constructive Sale Rules:
In 1997 Congress introduced IRS Section 1259 to prevent hedge funds and other investors from making ‘short sales’ against similar or identical positions, known as ‘short sales against the box,’ and entering futures or forward contracts that call for the delivery of an already-held asset.
This rule was created to counteract a practice employed by many investors and funds, and specifically the Lauder family when Estee Lauder Companies went public in 1995. You can check out the movie, The Big Short to learn more about this practice.
While digital assets investors and funds did not have to worry about these rules before, if the BBBA is passed, this provision will take effect immediately and will impact any contract signed after the date of the enactment of this act.
The bottom line
With the anticipation of the BBBA becoming law, crypto hedge funds and investors may want to consider selling any loss positions now to create a capital loss which may no longer be claimed in the future. If you are looking to write any futures contract, you should do it sooner than later.
If the BBBA gets passed as it is written today, crypto hedge funds and investors will need to consider a big change in managing and reporting gains and losses.
Aprio’s Blockchain Tax/KYC/AML/BSA Practice can guide you in implementing the proper policies to enable your systems to comply with these filing requirements. We have clients who have already implemented procedures to file IRS Form 8300, and we can guide you along the way.
Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding this matter.
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About the Author
Mitchell is the partner-in-charge of Aprio’s Tax practice as well as the Technology & Biosciences group. He has been a partner since 1990 with Aprio, which is the largest Georgia-based tax, accounting and consulting firm. Mitchell works with companies in the software, gaming, clean tech, financial technology (FinTech), health care IT, processing, biosciences (biotech and medical device) and manufacturing industries. Whether a company is pre-revenue, starting up, growing or preparing for a liquidity event, Mitchell works with them to maximize their potential at each stage. He is known for promoting research, innovation and entrepreneurship by enabling companies to be successful, regardless of where they are in their business lifecycle.