US lawmakers propose adding digital assets to 'wash sale' rule and raising capital gains tax

If passed, the plan would raise the capital gains tax rate for "certain high income individuals" to 28.8%, while eliminating the "wash sale" loophole for crypto users.

Democrats in the U.S. House of Representatives have proposed tax initiatives to fund a $3.5 trillion spending package which could potentially affect crypto users. 

According to a document released by the House Committee on Ways and Means on Monday, the proposal would increase the tax rate on long-term capital gains from the existing 20% to 25% for “certain high income individuals.” A surtax of 3.8% on net investment income would seemingly apply to the proposed changes, bringing the U.S. capital gains and dividends tax rate to 28.8% for wealthy crypto users.

In addition, the tax plan would add digital assets to the “wash sale” rules, which prohibit investors from claiming capital gains deductions on certain assets repurchased within 30 days of a sale, "previously applicable to stock and other securities." Existing tax laws under the IRS consider cryptocurrencies as property in wash sales — which some crypto users have been able to use to avoid capital gains — while the proposal from U.S. lawmakers would close this loophole.

If passed and signed into law, the plan would require crypto users to report taxes according to the new wash sale rules starting on Dec. 31, while the capital gains tax rate would apply to transactions made after Sept. 13. However, the bill for the $3.5 trillion spending package has not yet been finalized. In April, President Joe Biden’s administration suggested raising the capital gains tax rate for wealthy individuals to 43.4%.

The tax plan from House Democrats follows the passage of an infrastructure bill in the Senate suggesting implementing tighter rules on businesses handling cryptocurrencies and expanding reporting requirements for brokers. Many Democratic and Republican lawmakers have pushed for amending the language in the bill to clarify the role of cryptocurrencies, while the House is scheduled to vote on the proposal by Sept. 27.