Biden’s plan to close the crypto tax loss mining loophole is a step in the right direction

By Andy Lian

President Joe Biden’s proposed budget has caused a stir in the crypto community as it intends to end tax losses on crypto transactions. Reactions from the community have been mixed, with some perceiving this as an encroachment on crypto traders’ freedom, while others see it as a necessary step to regulate the industry and curb tax evasion.

Tax loss harvesting is a technique of minimizing an individual’s tax liability by deliberately selling an investment at a loss to offset current and/or future capital gains. It reduces the amount of tax one pays on the sale of profitable investments. Although tax loss collection is typically done manually towards the end of the year, a systematic approach that automatically identifies these opportunities and capitalizes on them throughout the year can be more effective, even for fixed income or income-generating securities. This approach allows individuals to reduce their tax liability by deducting losses from their taxable income. However, this strategy has come under criticism as a loophole that allows wealthy investors to evade taxes. It is estimated that ending tax loss collection on crypto transactions will bring in as much as $24 billion and reduce the deficit by $3 trillion.

Supporters of this proposal claim that it is an imperative measure to promote fairness and equity among taxpayers by ensuring everyone makes their fair contribution. They argue that the current tax system is biased in favor of the wealthy, who are able to exploit various tax loopholes and deductions to lower their tax burden. Ultimately, this means that the middle class and low earners are unfairly burdened with a disproportionate share of taxes. This imbalance leads to an unfair and unequal tax system.

On the other hand, critics of the Biden budget claim that ending tax loss reductions on crypto transactions is inadvisable as it could discourage innovation and investment in the cryptocurrency industry. They believe the move could prompt some investors to relocate their assets abroad or to other countries with more lenient tax policies, leading to a brain drain of talent and capital from the United States. Additionally, they claim that this change could disproportionately affect small and medium-sized businesses that depend on cryptocurrency investment and trading for their expansion and growth.

The tax loss recovery strategy is widely used by investors in the United States as a way to reduce capital gains taxes on their cryptocurrency investments. However, this approach is not widely used in other countries due to differences in tax policies specific to cryptocurrency investments. For example, in Canada, cryptocurrency investments are considered commodities and are therefore subject to capital gains tax. Meanwhile, in Australia, profits from cryptocurrency investments are also subject to capital gains tax, with cryptocurrency considered property for tax purposes.

In the UK, gains from cryptocurrency investments are taxable under capital gains tax, but it is not possible to use losses to offset other gains. On the other hand, in Germany, cryptocurrency investments held for more than one year are exempt from capital gains tax, but investments held for less than one year are taxed at the investor’s personal income tax rate. While other countries such as Japan and South Korea have also adopted specific tax policies for cryptocurrency investments, these policies may differ significantly and be revised over time to regulate the cryptocurrency industry and ensure tax equity. However, it is important to weigh the possible consequences of this change in policy.

In conclusion, I believe that closing the cryptocurrency tax loss recovery loophole as proposed in President Biden’s budget is not good policy. It could have a negative impact on retail investors, innovation and the market as a whole, while also generating no meaningful revenue for the government. Instead of this approach, I suggest exploring alternative strategies that encourage growth and innovation in the cryptocurrency industry while ensuring the government can generate revenue.

The author is an intergovernmental blockchain expert

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