Casey Wagner

The waning days of 2022 may be US crypto traders’ last chance to take advantage of a tax loophole that doesn’t exist in traditional finance: wash trading.



At least if certain politicians have their way.&nbsp;



In a Wednesday SEC filing, MicroStrategy said it had <a href="https://blockworks.co/news/microstrategy-bitcoin-wash-trading-tax-harvesting" target="_blank" rel="noreferrer noopener">sold</a> 704 bitcoins, before repurchasing 810 bitcoins two days later — for effectively the same price. A parallel trade of regulated securities would be an illegal wash trade: selling and repurchasing the same shares within a defined period in an attempt to realize a loss and pocket a tax benefit.&nbsp;



“Currently, the wash sale trading rule does not apply to crypto assets, and it is simply smart financial planning to do tax loss harvesting,” Kell Canty, CEO of Ledgible said. “This is exactly what Microstrategy has done here.”



When used to its full potential, tax loss harvesting gives traders the opportunity to offset ordinary income in a given year or in the future, according to Andrew Perlin, an accountant with TokenTax.



“If your capital losses for the year exceed your capital gains, you can use up to $3,000 of losses per year ($1,500 if you are married and filing separately) to offset regular income after reducing investment gain,” Perlin said in a recent <a href="https://tokentax.co/blog/guide-to-crypto-tax-loss-harvesting" target="_blank" rel="noreferrer noopener">blog post</a>. 



<h3>Offsetting capital gains with tax loss harvesting</h3>



Tax loss harvesting postpones tax obligations — it does not cancel those obligations. The idea for traders is that through tax-loss harvesting, investors can put more money into growing their portfolios, Perlin said. And realizing losses, in part, may reduce tax owed on capital gains.&nbsp;



“This is how the logic works: By the time you pay the taxes you postponed through tax-loss harvesting, your portfolio would theoretically have generated significantly more than the tax amount you owe,” Perlin said. “In this scenario, you would end up with a higher dollar amount in the long run.”



As long as bitcoin and other cryptocurrencies continue to not be classified as securities, MicroStrategy’s move is technically legal, according to Arthur Teller, TokenTax’s chief operating officer.&nbsp;



The Biden administration attempted to put an end to wash trading in crypto through an amendment to the Build Back Better Act, but the effort did not pass. The amendment would have made wash trading currencies, commodities and digital assets illegal, per the <a href="https://rules.house.gov/sites/democrats.rules.house.gov/files/Section_by_Section_BBB.pdf" target="_blank" rel="noreferrer noopener">draft’s text</a>.&nbsp;



Even with a legal bitcoin wash trade, there is one concern taxpayers looking to pocket a loss benefit should keep an eye out for, Teller said: the economic substance doctrine. 



“If a transaction does not appear to have a legitimate business purpose or lacks economic substance, then the tax benefits associated with that transaction are disallowed,” he said. “Put another way, even though the wash sale rules don&#8217;t apply to crypto, these types of transactions may still result in disallowed losses.”&nbsp;

MicroStrategy’s Bitcoin Wash Trade is Still Legal… For Now

Morgan Chittum

<div id="highlights-block_61fc3709532e4" class="highlights">
 <ul>
 <li>Wash trading is used to artificially raise the price of NFTs to pump the asset’s value</li>
 <li>Analysis of NFT sales indicate some sellers executed hundreds of wash trades last year</li>
 </ul>
 
</div>



NFT traders are uncovering a growing number of fraudsters profiting by pumping up the price of their digital art.



The scam is playing out through wash trading — in which a seller takes both sides of a trade to boost an NFT’s value — an increasing “area of concern,” according to a Wednesday <a href="https://blog.chainalysis.com/reports/2022-crypto-crime-report-preview-nft-wash-trading-money-laundering/" target="_blank" rel="noreferrer noopener">report</a> from crypto research firm Chainalysis.



Wash traders made profits of more than $8.9 million in 2021 in the nascent, multi-billion dollar space, according to the analysis, which surveyed 110 traders. The report only captures trades executed using ether or wrapped ether, excluding wash trading activity on other blockchains.



To calculate findings, Chainalysis tracked self-financed wallet transactions, “meaning they were funded either by the selling address or by the address that initially funded the selling address.” Analysis of sales indicate some sellers have pulled off hundreds of wash trades.



The gambit doesn’t always work, though.&nbsp;



Chainalysis said that out of 262 reported users who have sold an NFT to a “self-financed address” more than 25 times, 152 of those lost money. Although the profitable fraudsters have collectively made nearly $8.9 million, $416,984 in losses were booked by the rest.



Wash trading is still a “murky legal area” that has “yet to be the subject of an enforcement action,” according to the report.



“However, that could change as regulators shift focus and apply existing anti-fraud authorities to new NFT markets,” analysts from the firm wrote. “More generally, wash trading in NFTs can create an unfair marketplace for those who purchase artificially inflated tokens, and its existence can undermine trust in the NFT ecosystem, inhibiting future growth.”



These transactions are a drop in the bucket of the $8.6 billion laundered throughout crypto last year, the firm said. 



<a href="https://go.chainalysis.com/nft-market-report.html" target="_blank" rel="noreferrer noopener">Chainalysis</a> reported a minimum of $44.2 billion worth of Ethereum-based NFTs traded in 2021, up from $106 million in 2020.



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