U.S. Lawmakers Propose Digital Assets Under "Wash Sale" Rules and Raise Capital Gains Taxes

Democrats in the U.S. House of Representatives have proposed a tax initiative to fund a $3.5 trillion spending plan that could affect crypto users.

The proposal would raise the long-term capital gains tax rate for "certain high-income individuals" to 25 percent from the existing 20 percent, according to a document released Monday by the House Committee on Ways and Means. An additional 3.8 percent tax on net investment income appears to apply to the proposed changes, which would bring the capital gains and dividend tax rate to 28.8 percent for wealthy U.S. crypto users.

Additionally, the tax plan would include digital assets in the “wash sale” rules. The "wash sale" rule prohibits investors from claiming a capital gains deduction when they buy back certain assets within 30 days of selling them, "which previously applied to stocks and other securities." The IRS’s current tax law treats cryptocurrencies as wash-sale property — assets that some cryptocurrency users can leverage to avoid capital gains taxes — and the U.S. lawmaker’s proposal would close that loophole.

If passed and signed into law, the plan would require crypto users to file taxes under the new wash sale rules starting Dec. 31, while capital gains tax rates would apply to trades after Sept. 13. However, the $3.5 trillion spending plan has not been finalized. In April, President Joe Biden's administration proposed raising the capital gains tax rate for the wealthy to 43.4%.

The tax plan, proposed by House Democrats, came after the Senate passed an infrastructure bill that proposed stricter rules for businesses dealing with cryptocurrencies and expanded reporting requirements for brokers. Many Democratic and Republican lawmakers are pushing to revise language in the bill to clarify the role of cryptocurrencies, and the House of Representatives plans to vote on the proposal by Sept. 27.

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