Crypto Investors Could Lose Key Tax Advantage Under New House Proposal

Proposed crypto tax changes could limit loss-harvesting strategies by extending wash sale and constructive sale rules to many digital assets, while providing limited exemptions for certain categories of crypto activity.

• Key Takeaways:
• • Proposed legislation would extend wash sale restrictions to many cryptocurrency transactions.
• • Investors could face limits on claiming losses after rapid asset repurchases.
• • Exemptions cover qualified U.S. dollar stablecoins and digital assets acquired through staking, mining, and related validation activities.

House Proposal Would Bring Crypto Trades Under Wash Sale Restrictions

House Budget Chairman Jodey Arrington (R-TX) on June 17 issued a press release highlighting H.R. 9172, the “Applying Existing Tax Anti-Abuse Rules to Digital Assets Act.” The bill was introduced in the House on June 8 and referred to the House Ways and Means Committee, which oversees federal tax policy and revenue measures. The legislation would apply wash sale and constructive sale rules to digital assets.

Crypto investors could lose a tax advantage tied to loss harvesting, a tax-planning strategy in which investors sell assets at a loss to offset taxable gains and reduce their tax bill. The IRS treats digital assets as property for federal income tax purposes, leaving many crypto trades outside wash sale rules written for stocks and securities. Current rules generally allow investors to claim certain losses even if they quickly re-enter a similar position.

“America should lead the world in digital asset innovation, but that innovation shouldn’t come with preferential treatment in the tax code. Today, digital assets are exempt from anti-abuse rules that apply to other investment assets, creating loopholes that undermine parity and equal treatment under the law,” Arrington said, adding:

“My Applying Existing Tax Anti-Abuse Rules to Digital Assets Act closes these loopholes by applying the same commonsense safeguards that already apply to similar traditional financial assets, providing greater certainty for taxpayers and supporting the continued growth of America’s digital asset economy.”

The legislation would make several changes to existing tax rules. One of the most significant provisions is found in Section 2, which would change the wash sale statute by replacing “stock or securities” with “specified assets.” That new category would include stocks, securities, and digital assets, except qualified U.S. dollar stablecoins. The change would generally block quick repurchases that preserve the same market position after a tax-loss sale.

Investors would need to watch the same 30-day window used in traditional markets. A loss could be denied when a taxpayer sells a covered asset and enters a substantially identical position within 30 days before or after the transaction. The bill also extends similar treatment to certain short sales and futures contracts.

Stablecoins, Staking, and Mining Get Different Treatment

Qualified U.S. dollar stablecoins would sit outside the bill’s wash sale definition. The proposal also protects digital assets received through validation activities, including staking, mining, and similar work used to support digital asset transactions. Those carve-outs would limit the reach of the wash sale expansion.

Tokenized and wrapped assets receive separate treatment in the bill. A tokenized digital asset, or certain wrapped digital assets, could be treated as substantially identical to an economically equivalent stock, security, or digital asset. That language targets trades that recreate the same economic exposure through a different digital form.

House Ways and Means Committee Chairman Jason Smith (R-MO) said: “Bad actors should not be able to game the system and evade longstanding anti-abuse rules by moving from traditional financial assets to digital assets.” He stressed:

“Congress established anti-abuse rules like the wash sale and constructive sale provisions to close loopholes and protect the integrity of our tax system. However, because those rules were created before digital assets existed, a regulatory gap has emerged that some individuals have exploited.”

The bill would also expand constructive sale rules to digital assets, excluding qualified U.S. dollar stablecoins. Constructive sale rules generally apply when investors use certain transactions to effectively lock in investment gains without selling the asset and recognizing taxable income. H.R. 9172 would add digital assets to that framework and include language covering widely traded digital assets.

The proposal defines a “widely traded digital asset” as one that is actively traded on an exchange and meets certain size and ownership requirements. Generally, the asset must have a market value exceeding $500 million during the previous year, and the taxpayer and related parties cannot own more than 10% of it. The $500 million threshold would be adjusted for inflation after 2027.

H.R. 9172 does not create a new crypto tax rate. It changes how existing anti-abuse rules would apply to digital assets, with wash sale changes covering dispositions after the bill’s introduction and constructive sale changes covering constructive sales after that date.