Biden budget proposes closing crypto loophole to raise $24 billion in new revenue
Tucked within President Biden's budget is a proposal to change the tax treatment of cryptocurrency transactions that would eliminate investors' ability to take advantage of losses to lower their tax bills.
The new provision would raise $24 billion, according to the White House.
Currently, crypto sales aren’t subject to the same rules that investors in stocks or bonds have to follow. Investors can sell crypto investments at a loss, take the tax-deductible loss to reduce their tax burden, and buy right back into the same investment.
The budget eliminates this and subjects crypto to the same so-called wash-sale rules that apply to stocks and bonds.
House Democrats proposed legislation last Congress to close the tax loophole, by imposing the "wash sale" rules on commodities, currencies, and digital assets. The IRS treats crypto as property, not as a security, which is how the asset class escapes these rules.
President Biden already passed a crypto-related tax provision that was tucked in his 2021 infrastructure act, causing an uproar from the industry. The law defined a cryptocurrency "broker" broadly, allowing the Internal Revenue Service to target crypto miners, developers, and others who could be considered brokers even if they don't have any customers or have access to information needed to comply with tax reporting requirements.
The Treasury Department later clarified that miners, validators, and other crypto users will not be classified as crypto "brokers" under tax reporting rules.
Biden's proposal comes as Federal Reserve Vice Chair of Supervision Michael Barr emphasized in a speech Thursday at the Peterson Institute in Washington that the same regulations that safeguard banks should apply to crypto if the activity is analogous without squashing innovation, while warning banks to tread carefully in the crypto space.
The Federal Reserve, the FDIC,and the Office of the Comptroller of the Currency last month encouraged banks that use funding from crypto firms to monitor liquidity and maintain strong risk management practices to prevent runs.
The warnings come just as Silvergate Capital, one of the crypto market's top banks, became the first crypto bank to fail after feeling ripples from FTX's collapse that caused billions in deposit withdrawals.
"Like everyone else we've been watching what’s been happening in the crypto space and what we see is quite a lot of turmoil, we see fraud, we see a lack of transparency, we see run risk, we see lots of things like that," Powell told lawmakers earlier this week.
"What we've been doing is making sure that the regulated financial institutions that we supervise and regulate are careful and taking great care in the ways they engage with the whole crypto space."
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