This bill applies existing tax anti-abuse rules, specifically wash sale and constructive sale rules, to digital assets while defining related terms and establishing exceptions.
Jodey Arrington
Representative
TX-19
This bill, the "Applying Existing Tax Anti-Abuse Rules to Digital Assets Act," amends the Internal Revenue Code to explicitly apply wash sale and constructive sale rules to digital assets. It broadens the definition of "specified assets" to include most digital assets, while creating specific exceptions for assets like qualified U.S. dollar stablecoins received through transaction validation. The Act also establishes comprehensive definitions for various digital asset terms for tax purposes.
Crypto Loophole Closure: Wash Sale and Constructive Sale Rules to Hit Digital Assets Starting in 2024
The 'Applying Existing Tax Anti-Abuse Rules to Digital Assets Act' is essentially the tax man catching up with the blockchain. It officially brings digital assets under the same 'anti-abuse' rules that have governed stocks and bonds for decades. Specifically, it targets 'wash sales'—where you sell at a loss and buy back immediately to lower your tax bill—and 'constructive sales,' which involve using complex maneuvers to lock in gains without technically selling. If you’ve been using crypto volatility to harvest tax losses while keeping your position, the rules are about to change.
No More Quick Re-buys
Under Section 2, the bill expands the 30-day wash sale rule to include almost all digital assets. Currently, if you sell Bitcoin at a loss and buy it back five minutes later, you can often claim that loss on your taxes. This bill ends that. If you buy a 'substantially identical' asset within 30 days before or after the sale, you can’t claim the loss. For example, a software developer who sells Ethereum during a dip to offset their salary taxes, only to buy it back the next day, would find that loss disallowed. The only major exception here is for 'qualified U.S. dollar stablecoins,' which the bill treats more like cash, provided you aren't using a foreign currency for your business.
Locking in Gains is Now a Sale
Section 3 tackles 'constructive sales,' which is a fancy way of saying you’ve effectively sold an asset even if you still hold the keys. If you use a digital asset to take a position that eliminates your risk of loss and your opportunity for gain—like certain hedging strategies—the IRS will treat it as if you sold the asset for its fair market value that day. This includes 'tokenized' assets; if you hold a digital token that represents a share of Apple stock, the law will treat it just like the stock itself. This prevents high-volume traders from 'freezing' their profits to avoid a tax hit at the end of the year.
New Labels and Secretary Power
The bill introduces a heavy dose of new vocabulary in Section 4, defining everything from 'wrapped' assets to 'staking.' While it helpfully clarifies that mining and staking rewards don’t trigger a wash sale, it gives the Treasury Secretary significant power to decide which assets are 'widely traded.' For instance, if a digital asset has a market cap over $500 million, it’s likely 'widely traded,' but the Secretary can change these rules if they think an asset is being manipulated. For the average person holding a bit of crypto in a wallet, this means your tax software and your broker (like Coinbase or Kraken) are going to have a much more complicated job reporting your activity to the IRS, especially as these definitions evolve with inflation and Treasury regulations.