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Are Wash Sales Coming To Cryptocurrency!? - YouTube
Channel: Brian Rivera, CPA
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our wash sales come into the crypto
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space lord i hope not because if it is
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it's gonna be a freaking nightmare when
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it comes to reporting your taxes so all
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this is not final legislation i thought
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it might be a good idea to take a look
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under the hood to see what uncle sam
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might have potentially up his sleeve
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when it comes to the cryptocurrency
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space come next tax season let's run it
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what's going on everybody brian rivera
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here cpa and on this channel i typically
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talk about personal finance
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entrepreneurship investing crypto day
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trading just a lot of things that i'm
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passionate about so if this is your
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first time here don't forget to hit that
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subscribe button so it's no secret the
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white house and congressional democrats
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want to raise taxes on the wealthy they
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want to raise taxes on corporations and
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they also want to strengthen enforcement
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and how they're going to do that is
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obviously hiring more irs agents and
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also issuing more audits but the purpose
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of all this is to fund programs such as
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you know child care health care
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education climate change you know things
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that matter all these programs and all
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these spendings need to be funded
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through additional tax revenue just a
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few days ago the house committee on ways
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and means just released a draft tax
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proposal the committee has jurisdiction
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over tariffs taxes other revenue related
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raising activities and they also have
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oversight over programs such as social
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security
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medicare adoption of foster care just to
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name a few there's a lot of interesting
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proposals in this bill i'm not going to
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cover everything primarily because you
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know these tax bills go through a lot of
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different variations and you know
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whatever is the the first draft will not
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be the last draft but i really want to
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take a look at this watch though thing
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so let's go ahead and see what exactly
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was put in the bill to give you guys a
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better understanding of what i'm talking
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about section 138 153 wash sales so this
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section includes commodities currencies
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and digital assets in the washoe rule so
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an anti-abuse rule previously applicable
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to stock and other securities the washoe
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rule in section 1091 prevents taxpayers
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from claiming tax losses while retaining
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an interest in the lost asset the
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amendments made by this section apply to
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taxable years beginning after december
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31 2021. so as it stands the wash cell
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rule is only applicable to equities and
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options congress expects to find more
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tax revenue by closing down this
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loophole that cryptocurrency traders
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have been enjoying for many many years
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now now what this loophole is called is
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tax loss optimization or tax loss
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harvesting and so basically when you
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employ this strategy all you're really
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doing is one is you look to see okay
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what is your capital gains exposure on
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the year and what you're gonna do is
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you're going to scan any of the coins
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that you're holding in your portfolio
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and if any of them are a loser right
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before the end of the year you're going
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to do what's called tax loss selling
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you're going to sell those positions
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right because you're trying to reduce
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your overall capital gains exposure and
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what that loss is gonna do it's gonna
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net against it right to bring down your
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exposure if you still believe in that
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project you just turn around and rebuy
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it again right you take the loss bring
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down your taxes and then get back in the
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project because you believe in that
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project long term what is a wash cell so
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irs code section 1091 identifies exactly
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what a wash sale is but a very high
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level what a wash shell is if you
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sell a stock at a loss and in a 30 day
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window you buy or sell a substantially
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identical security or option in that
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same name you've just flagged a wash
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sale now that loss gets disallowed for
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tax purposes and it gets added to the
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cost basis of your very next trade or
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your replacement trade now the washoe
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rules applies to active day traders the
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same way it applies to investors however
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the difference here though is as a day
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trader you have thousands and thousands
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of transactions so to keep accurate
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records of your wash sales it's
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virtually a nightmare right so you
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either gotta hire a cpa firm or you have
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to find a solution that will allow for
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accurate tax reporting right now this
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rule only applies to your gains and not
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your losses because naturally the irs
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would prefer to tax your gains like i
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said earlier stocks and options are
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subject to the washoe rule and currently
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as it stands the irs classifies
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cryptocurrency as a property and so this
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loophole allows for very savvy savvy
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crypto investors to sell more
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aggressively so should they change
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something this loophole that
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cryptocurrency traders have been
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enjoying for years the tax loss
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harvesting and optimization they will no
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longer be able to do that and now they
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would have to account for things you
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know using the wash sale rule so how
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would wash sales actually look in the
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cryptocurrency space my assumption is
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that the wash cell is going to be
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applicable to similar coins that you
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trade across multiple exchanges in
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multiple wallets so for example coinbase
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doesn't know what you're trading at
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binance and binance doesn't know what
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you're trading at gemini gemini doesn't
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know what you're trading at kraken right
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so you're going to have to not only look
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at wash sales across your individual
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exchange accounts or your individual
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wallets but you're also going to have to
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look left and look right to see if any
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wash sales were flagged across those
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different exchanges so let's go ahead
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and take a look at an example of how the
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wash sale rule could potentially impact
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a cryptocurrency trader so what i'll do
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is i'm going to use a basic example with
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some basic trades that you could follow
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just so that you can get an overall big
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picture of how this stuff works now just
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keep in mind this is a very simple
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example when you throw in thousands of
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trades it gets very complex and it gets
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very very time consuming on trying to
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figure out how to get accurate reporting
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all right so i'm going to use myself as
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an example so let's say brian
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purchased 10 ethereum on may 11 2021 at
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that time it was four thousand dollars
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per coin and his total cost basis uh in
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that position is forty thousand dollars
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so around christmas time ethereum
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dropped fifty percent and he decided to
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do some tax loss harvesting right so he
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sold five ethereum on christmas eve for
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ten thousand dollars then he sold the
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remaining five on christmas day for
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eleven thousand dollars how that's gonna
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look from a tax reporting standpoint is
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basically uh your cost basis is gonna be
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what you paid for it your sales proceeds
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are gonna be what you sold it at right
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so your net gain and loss on this
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particular trade you bought it for forty
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thousand sold it for twenty one thousand
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you took a nineteen thousand dollar loss
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so this is how it actually looks right
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now today how you would report your
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taxes as a cryptocurrency trader so
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brian would then recognize a 3 000
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capital loss right so i can't take the
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whole 19 000 loss because i am subject
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to the capital loss limitation rules the
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remaining 16 000 would then be carried
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forward as a capital loss carry forward
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so in the next year in 2022 when i start
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banking making a bunch of money on
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crypto i'll have gains that are gonna
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get offset by the sixteen thousand
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dollars that i carry if i don't make any
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money i write off three thousand and
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i'll keep carrying that forward so let's
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go ahead and throw a variable in this
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transaction so we're going to keep the
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same facts and circumstances but now
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we're going to assume
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that i decided to
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scalp ethereum two days after my
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original cell so what i did was i bought
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10 ethereum for 40 000 on december 26
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and then i sold 10 ethereum for 41 000
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on december 27 2021 so i made a thousand
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bucks on my scalp trade right here we
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have the original transaction but
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because i bought the same coin within a
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30-day window of the original cell
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the
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loss gets disallowed for tax purposes so
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as you can see up here i would have
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taken a 19 000 loss but because this is
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a wash sale it gets disallowed but it
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then gets added to the cost basis of the
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very next trade so this loss is getting
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added to the 20 000 purchase that i just
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made on my new trade and then this wash
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sale is getting added to here so that's
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why my cost basis is so high so instead
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of being 40 000 of my new buy it is now
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59 000 because i'm adding these wash
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cells in right so when you account for
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everything you know my net gain or loss
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is actually the same because i didn't
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lose the cost basis right so i made a
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thousand dollars on my new trade and
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then i lost 19 000 on my last trade so
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my total net gain or loss on the year is
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18 000 so per the washoe rule the
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disallowed loss is added to the cost
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basis like i mentioned earlier of the
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new buys and then the holding period is
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also added to the new trade now this is
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where wash sales can really really come
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back to bite you same facts and
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circumstances however i'm going to
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change the last trade so let's just say
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one week later instead of the last week
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of december i decided to trade it the
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first week of january so let's just say
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i bought 10 ethereum for 40 000 on
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january 1st wanted to start the new year
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off right and then a day later i decided
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to sell it i sold it for 41 000 on
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january 2nd which i generated a profit
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of 1 000
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so let's look at how this gets reported
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because i've flagged a wash cell in a
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separate tax period or within 30 days
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but it just just so happened to be in
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the next tax year the entire wash cell
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that i flag of nineteen thousand dollars
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is now just disallowed but it's also
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deferred to the next tax year right so
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now i'm not getting a 19 000 capital
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loss carryover right i'm reporting zero
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on my tax return you're like wait a
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minute i didn't make any money actually
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i lost 19 000 so for tax purposes i'm
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claiming zero which sucks but however
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this wash sale is going to get carried
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into the next year so many times when
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people see this adjustment column they
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automatically assume that all of this is
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disallowed which is not the case it's an
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informational number that is going to
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accumulate over the year because you are
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flagging wash sales as you go but in
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this situation you want to identify any
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deferrals that you're going to have
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going into the next year and that number
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that your broker is going to report is
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not going to include that number so if
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this rule is accepted what exactly can
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you do well my advice is one is you want
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to make sure you get yourself educated
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on wash sales and two is you just need
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to adapt right you know just modify your
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trading strategy to make sure that
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you're not going to put yourself in a
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position where you have disallowed wash
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cells if the ways and means committee's
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proposal is accepted basically what's
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going to happen is all of your trades
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after december 31st 2021 will be subject
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to the wash sale rule so my advice is it
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will behoove you to leverage any tax
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loss harvesting right now before the law
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changes in 2022. but again i'm not
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saying that it's legislation but it's in
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the bill and it's highly likely that it
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could pass so after this date your
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responsibility as an individual taxpayer
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would be to accurately track your cost
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basis
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and
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comply with the new rule set so i'm
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going to go ahead and say that most
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traders are probably going to have a
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hard time
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trying to figure out how to implement
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this and i'm also going to say that cpas
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are going to have a hard time learning
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how to implement this it's just because
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there's not a lot of education around
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this and there's just not a lot of
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people who play in this space but no
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fear
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good news is here so i have a
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development team that i've hired
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that specifically
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created a wash cell algorithm not only
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for the stock and options market but
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also forecasting this very situation uh
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for the cryptocurrency space so
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historically i've only been using this
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internal to my company
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for stock options traders but now we are
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also pivoting to incorporate
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cryptocurrency now the washoe
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calculation will look across multiple
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exchanges like i mentioned earlier also
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your wallet and apply the cost basis
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adjustments automatically for you as the
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taxpayer so the application is obviously
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not ready for public release it takes a
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lot to get an application ready for end
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users but the goal is to kind of finish
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quality user testing all that good stuff
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and have something ready for the public
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during q1 that is my goal but we'll see
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so if you're interested in being
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notified about when this application
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will be released to the general public
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i'm going to leave a link below where
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you can get on the email list and you'll
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be notified once the application is
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ready to start taking on new users so
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the goal obviously is just to make sure
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that we can integrate real-time
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portfolio reporting to streamline tax
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reporting for both crypto and or stock
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and options traders the last point i
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want to make is that if you're an active
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day trader you're going to want to
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familiarize with yourself with something
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called day trader status now i already
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have a video out on this that's very
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much geared towards the equities market
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however i do plan on doing an update on
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how this applies to cryptocurrency
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traders should you qualify as a trader
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then you may want to look into electing
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mark to market for cryptocurrency trades
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if the irs treats cryptocurrency as a
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security you qualify as an active trader
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then you should be able to elect mark to
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market or at least proactively elect it
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and once the guidance changes you
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already have the election on file but
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again this is all based on if the tax
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code changes the laws around
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cryptocurrency trading alright family
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hopefully you found some value in
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today's video don't forget to smash that
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like button and i'm actually dying to
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know do you guys think that the irs is
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going to implement the washoe rule by
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next tax season drop a comment below and
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let me know what you guys think enjoy
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the rest of your day have a good one
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uh
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