Top cryptocurrencies are coming under price pressure. Bitcoin (CRYPTO: BTC), ether‘S (CRYPTO: ETH) Ether tokens and Dogecoin (CRYPTO: DOGE) all posted significant sell-offs today – with tokens down 2.7%, 4.7% and 3.7%, respectively, at 4:15 p.m. EDT. It is possible that more volatility is in sight in the short term.
House Democrats on Monday outlined plans for a series of tax increases, and legislature’s proposals included new regulations and tax changes that could affect the cryptocurrency market. As part of the proposed changes, cryptocurrencies would be completely subject to wash sale rules, which would likely result in crypto traders having to pay more taxes.
Despite the recent volatility, Bitcoin and Ethereum are still in positive territory for the last month of trading. Meanwhile, Dogecoin has fallen around 5.5% across the board.
The Internal Revenue Service currently groups cryptocurrencies into the real estate category rather than the securities category that stocks fall under. This allows some crypto traders to make short term trades without falling under the wash sale rules and defer capital gains.
If a trader sells a stock at a loss and then purchases an equivalent stake within that stock within the next 30 days, that transaction would be classified as a wash sale and would not be subject to normal tax deductions for the sale at a loss. The current classification of cryptocurrency as property allows traders to make short term trades while they still qualify for the capital loss deduction, but it looks like this is coming to an end.
While cryptocurrencies subject to current stock wash sale rules would create a new tax liability for some traders, it doesn’t look like a big deal either. Long-term Bitcoin, Ethereum, and Dogecoin holders may be more concerned that the proposed tax changes are just a first step towards tighter regulation of cryptocurrencies.
On the flip side, crypto assets can also provide hedge against inflation and other sources of economic and political instability, and leading cryptocurrencies have seen excellent returns over the past year. It is difficult to predict what will happen to the crypto space in the short term, and investors should move forward with an understanding that even leading cryptocurrencies will continue to be risky and rewarding games.
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