Over the past month, Washington has been abuzz with talks of President Biden’s multi-trillion dollar Build Back Better spending framework. While it is unclear whether this bill will pass Congress, its draft suggests a few methods to cover the costs of its implementation.
One such suggestion is introducing measures that will make it harder for crypto adopters to evade paying capital gains taxes on crypto. Reportedly, the spending bill’s 1,684-page draft made this information public for the first time earlier today.
The information is found in a small section that deals with digital assets and suggests the amendment of section 1259 of the Internal Revenue Code to include digital assets. Specifically, the bill seeks to enforce the Constructive Sale rule in digital currencies.
Created in 1997, the Constructive Sale rule sought to prevent hedge funds from evading the reporting and payment of short-term capital gains taxes.
To circumvent taxation at the time, hedge funds kept long and short positions on the same asset, allowing them to turn short-term capital gains into long-term ones. This tactic helped them keep their taxes at favorable rates.
Trying to curb tax evasion
According to the draft, a digital asset is any digital representation of value, which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary.
Should the bill pass into law, the Constructive Sale rule would apply to all crypto transactions. This rule would prevent adopters from taking advantage of the same loophole as hedge funds.
Giving an example of how crypto traders can dodge paying short-term capital gains, Nathan Perry, a tax attorney with DCX Technology, said traders can buy Bitcoin (BTC/USD) at $60,000.00 (£43,539.90) and wait until its value rises to $100,000.00 (£72,566.50).
It’s about buying offsetting options to lock in gains turning short term cap gains into long term cap gains to get the better rate. Ex. You buy btc at $60k. It appreciates to $100k but it’s a short term capital gain. So you buy a put with a right to sell it for $100k thus…
— Nathan C. Perry (@NathanCPerry) October 28, 2021
The traders would then buy a put with the right to sell at $100,000.00 (£72,566.50), thus locking in the capital gain.
He added that without section 1259 of the Internal Revenue Code applying, traders can turn a short-term capital gain into a long-term capital gain.
However, this is not the only tax-evasion loophole that the Biden administration seeks to eliminate. By targeting Wash sales, Democrats believe the government can net up to $16 million (£11.62 million) in tax revenue over a decade. To achieve this feat, the government would have to bring extant IRS code into play.
The post Biden’s $1.85T spending bill targets capital gains taxes on crypto appeared first on Invezz.
from Bitcoin – Invezz
