Congress killed a landmark wildlife bill to preserve a massive crypto tax loophole
Better luck next time, bud.
A major US wildlife-conservation bill with bipartisan support failed at the last minute of negotiations in Congress, because lawmakers could not agree on closing a massive tax loophole that benefits cryptocurrency traders.
The legislation, known as the Recovering America’s Wildlife Act (RAWA), would have committed $1.3 billion a year over the next decade to programs that reconstruct and protect animal habitats. It was the biggest piece of legislation dedicated to wildlife conservation since the Endangered Species Act of 1973.
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The wildlife bill had enough support to pass through Congress, but was held up because some legislators insisted on offsetting the expense with equivalent cost savings or tax revenue. Earlier this month, a bipartisan group of senators coalesced around the idea of raising funds by changing how the US taxes crypto and other digital assets, according to E&E News.
That change would have ended a legal tax-avoidance strategy widely used by crypto traders to generate dubious losses with so-called wash sales, by selling tokens and immediately buying them back. Among those using the loophole was bankrupt crypto exchange FTX, Quartz previously reported.
Billions of dollars in missed tax revenue
Closing the crypto wash-sale loophole would raise $16.7 billion for the US over 10 years, according to an estimate by Congress in 2021. That’s more than enough to pay for RAWA’s vision of funding for state wildlife agencies and Native American tribes to protect threatened habitats and endangered species.
But neither RAWA nor the crypto tax change is included in the spending bill, released to the public on Dec. 20 just hours before its first Senate vote. It’s expected to be the last major piece of legislation passed by Congress this year. And though it has bipartisan support, wildlife conservation is less likely to get attention when Republicans take over the House in January.
It’s not clear what—or, really, who—killed the legislation. E&E, which covers lobbying over energy and environmental issues, reported before the spending bill was released that lawmakers were “squabbling over what specific assets and commodities” would be subject to new restrictions on wash sales.
Sponsors of RAWA in the Senate didn’t respond to requests for comment on the status of the legislation.
How the crypto wash-sale loophole works
To understand why the loophole is so egregious, consider this hypothetical we previously put forth:
Let’s say you bought one bitcoin for $40,000 at the beginning of this year. Maybe you watched the Super Bowl ads, and came away thinking fortune favors the brave. And it sure felt that way until mid-year, when bitcoin began falling sharply; it now trades around $17,000. But you think bitcoin still has a bright future, so you commit to maintaining the position long-term.
Here’s the totally legal tax move: Rather than just holding onto your bitcoin for dear life, you sell it at $17,000 and then immediately buy it back. You have realized a $23,000 loss, which can be used to offset other income and lower your taxes. And yet you haven’t lost anything at all, really: You still own one bitcoin, and you can enjoy any future gains from the investment. Meanwhile, you get to pay less in tax and invest the savings.
After a two-year bull run, 2022 was brutal year for crypto traders. The total “market capitalization” of tokens tracked by Coingecko has fallen 64% from the beginning of the year. If your stock portfolio was down by two-thirds, you’d have to actually sell the stocks in order to take a loss on your taxes this year. But crypto traders can book the loss and keep the asset, using wash sales.
By preserving the loophole, Congress just brightened an otherwise dismal year for the crypto industry, at the expense of billions of dollars in tax revenue and America’s most significant wildlife-conservation effort in 50 years.
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