How Microstrategy Lowered Its Tax Obligation With a Crypto Loophole

MicroStrategy bought a large number of bitcoin on Wednesday, sold a portion at a net loss, and bought the cryptocurrency just two days later. The business intelligence firm did this deliberately to reduce its capital gains tax this year, allowed by an IRS policy that applies to other securities but not crypto.

IRS Does not Consider Crypto to be Security, Allowing Crypto Investors Reduce Capital Gains Tax

Retail crypto investors can cut their capital gains tax in 2022 by offloading crypto assets at a loss and repurchasing them immediately. This strategy was employed earlier this week when Michael Saylor’s MicroStrategy purchased 2,395 bitcoin, sold a portion of that amount at a loss, and bought another 810 bitcoin just two days later.

As opposed to other investors, crypto investors can do this thanks to a regulatory distinction crypto assets have, tax experts said. Regarding other securities, US investors who sold assets for a net loss at the end of the tax year can deduct from their capital gains tax by up to $3,000, while the additional losses get carried over to the new tax year.

Investors regularly employ this strategy, particularly those who sustained major losses during a year, tax lawyer Benjamin Goldburd said. However, there is a specific Internal Revenue Service (IRS) policy known as the “wash rule,” which keeps investors from offloading certain assets to benefit from the tax deduction.

But the wash rule does not apply to crypto, Goldburd explained. This is because crypto is not considered a security by the IRS but rather an asset “and thus the heavy aspects of tax law don’t apply to it, including the wash sale rule,” he said. This allows crypto investors to sell cryptocurrencies at a net loss and buy them back instantly while still registering a loss in their tax filings.

Crypto Investors at Advantage as Long as Wash Rule Remains Unchanged

If the IRS doesn’t change its policy and keeps treating crypto as assets, it would give a notable advantage to crypto investors looking to mitigate losses while holding on to their assets into the new year. Cryptocurrencies are currently trading at multi-year lows due to the ongoing market downturn and a series of collapses in the industry.

“From a trading aspect, you have to know what you’re doing, so it’s not necessarily for crypto novices… The IRS has also been silent on the matter, so while crypto is not designated a security from a tax perspective, there’s always the chance the IRS could put up a fight on this matter, and they just haven’t yet.”

As opposed to the IRS, the US Exchange and Securities Commission (SEC) considers many widely-traded cryptocurrencies to be securities. The SEC’s views have been frequently criticized by the crypto community as they could result in regulatory requirements that would cripple the digital assets’ growth.

This article originally appeared on The Tokenist

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