According to a Group of Economists, Unregulated Wash Trading is Impacting Tax Revenue

Quartz | Nate DiCamillo | Dec 6, 2022

Unsplash Wance Paleri trading - According to a Group of Economists, Unregulated Wash Trading is Impacting Tax Revenue

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Crypto traders don’t have to move their funds offshore to evade US taxes, as long as the US government allows wash trading of the nascent asset class.

  • Tax loss harvesting: A group of economists from Cornell University, the University of North Carolina, and Tel Aviv University have discovered that every time the US increases crypto tax scrutiny, trading activity rises at US-based exchanges. That’s because traders are selling crypto, recording losses on their taxes, and buying it back to avoid incurring any actual losses. The economists released their findings this week in a working paper published by the National Bureau of Economic Research.
    • It is illegal for stock traders to engage in wash trading, which occurs when they buy and sell an equity within a 30-day period before or after the sale.
    • This rule doesn’t exist for crypto in part because of the scattered regulatory approach the US has taken towards it, the economists argue.

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  • Regulatory confusion: The IRS, for instance, treats crypto as property, while the Commodity Futures Trading Commision, which regulates derivatives markets, treats it as a commodity. Meanwhile, the SEC wants to apply securities regulation to large parts of crypto. The Financial Accounting Standards Board has said that accountants should no longer treat crypto as an intangible asset and should instead adopt fair-value accounting for it.
    • As a result, the US is losing a significant amount of tax revenue. The researchers assumed a tax rate of 30% and paired that with falling bitcoin prices, and then estimated that the US Treasury likely lost somewhere between $10 billion and $16.2 billion.

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