What happened
Top cryptocurrencies are coming under pricing pressure. Bitcoin (BTC 0.27%), Ethereum's (ETH -0.28%) Ether token, and Dogecoin (DOGE 0.70%) have all posted significant sell-offs today -- with the tokens down 2.7%, 4.7%, and 3.7%, respectively, as of 4:15 p.m. EDT. It's possible that more near-term volatility is in the cards.
House Democrats outlined plans for a series of tax increases on Monday, and the proposals from legislators included new regulations and tax changes that could impact the cryptocurrency market. Under the suggested changes, cryptocurrencies would become fully subject to wash-sale rules, which would likely result in crypto traders needing to pay more in taxes.
Image source: Getty Images.
So what
Despite recent volatility, Bitcoin and Ethereum are still in positive territory over the last month of trading. Meanwhile, Dogecoin is down roughly 5.5% across the stretch.
Bitcoin Price data by YCharts
The Internal Revenue Service currently groups cryptocurrencies under the property category, rather than the securities category that stocks fall under. This allows some crypto traders to conduct short-term trades without falling under wash-sale rules and defer capital gains.
If a trader sells a stock at a loss and then buys an equivalent holding within that equity within the next 30 days, that transaction would be classified as a wash sale and not subject to the normal tax deductions for selling at a loss. Cryptocurrency's current classification as property is allowing traders to make short-term trades while still qualifying for the capital loss deduction, but it looks like that may be coming to an end.
Now what
While cryptocurrencies becoming subject to the current wash-sale rules that apply to stocks would create new tax liability for some traders, it also doesn't look like a huge deal in the grand scheme of things. Long-term Bitcoin, Ethereum, and Dogecoin holders may be more concerned that the proposed tax changes are just an early step in cryptocurrencies coming under tighter regulation.
On the other hand, crypto assets may also provide a hedge against inflation and other sources of economic and political instability, and leading cryptocurrencies have put up stellar returns over the last year. It's hard to predict what will happen to the crypto space in the short term, and investors should move forward with the understanding that even leading cryptocurrencies remain high-risk, high-reward plays.
