US Lawmakers Introduce PARITY Act to Reform Crypto Tax Rules and Close Wash Sale Loophole
US lawmakers have proposed the PARITY Act, a legislative effort aimed at aligning cryptocurrency tax treatment with that of traditional equity securities. Central to the proposal is the application of the wash sale rule to crypto assets, closing a current tax loophole that allows investors to harvest losses without waiting periods. The Act also seeks to introduce tax relief on staking rewards and everyday crypto transactions, signaling a significant shift in regulatory approach amid growing institutional and retail crypto activity.
What happened
The PARITY Act was introduced to address discrepancies in how cryptocurrencies are taxed compared to traditional securities. Currently, the wash sale rule—which disallows claiming tax losses on the sale of substantially identical securities if repurchased within 30 days—applies only to equities and not to crypto assets. This gap has enabled crypto investors to engage in frequent tax loss harvesting strategies without the same restrictions, potentially increasing trading volume and market liquidity.
The proposed legislation aims to extend the wash sale rule to cryptocurrencies, thereby closing this loophole. Alongside this, the Act incorporates provisions to provide tax relief for staking rewards and routine crypto transactions, which are often taxed as ordinary income at the point of receipt or use under current rules. These changes are designed to bring crypto tax treatment closer to that of traditional equity markets.
Support for this alignment is reflected in the positions of major ETF issuers such as Vanguard and BlackRock, who have publicly endorsed applying traditional securities tax rules to cryptocurrencies. Their rationale includes simplifying compliance frameworks and reducing distortions in market behavior caused by uneven tax treatment.
According to IRS Publication 550, the wash sale rule in traditional markets serves to discourage tax-motivated trading and can contribute to market stability by limiting short-term loss harvesting. In contrast, crypto’s exemption from this rule has been linked to increased tax loss harvesting strategies, which some analysts suggest may boost trading volumes but also contribute to heightened market volatility.
Why this matters
The PARITY Act’s proposed reforms could significantly alter investor behavior and market dynamics in the crypto space. By imposing the wash sale rule on cryptocurrencies, the legislation would reduce opportunities for rapid tax loss harvesting, likely dampening some short-term speculative trading. This could lead to lower trading volumes but potentially enhance market stability and quality, mirroring effects observed in traditional equity markets.
At the same time, the tax relief provisions for staking rewards and everyday crypto transactions may encourage broader adoption and utility of cryptocurrencies. Currently, taxing these activities as ordinary income at receipt or use can create friction for users and limit crypto’s practical use cases. Reducing this tax burden could increase transactional liquidity and support the maturation of crypto markets.
Institutional investor support, as indicated by ETF issuers, underscores a desire for regulatory clarity and parity. Aligning crypto tax rules with those of traditional securities may attract more institutional capital, fostering greater market depth and maturity. However, balancing these benefits against the potential reduction in liquidity from limiting tax loss harvesting remains a key consideration.
What remains unclear
Several important questions about the PARITY Act’s implementation and impact remain unanswered. The legislation does not specify how the IRS will define “substantially identical” crypto assets under the wash sale rule, a complex issue given the diversity and rapid innovation within the crypto ecosystem.
Details on the timeline for enactment and enforcement mechanisms are also absent, leaving uncertainty about when and how these rules would take effect. Moreover, the differential impact on retail versus institutional investors is not addressed, nor is there clarity on whether the proposed tax relief for staking and transactions will sufficiently offset any liquidity reductions caused by the wash sale rule’s application.
Empirical data on the economic or behavioral effects of these changes are not yet available, as the PARITY Act remains a proposal. No official guidance from the IRS or Treasury Department has been released to clarify implementation specifics or address potential unintended consequences such as increased compliance costs or effects on decentralized finance (DeFi) markets.
What to watch next
- IRS and Treasury Department announcements regarding the definition and scope of “substantially identical” crypto assets under the wash sale rule.
- Legislative progress of the PARITY Act, including debates, amendments, and potential passage timelines.
- Responses from retail and institutional crypto investors on the proposed tax changes, particularly concerning trading behavior and staking activity.
- Statements or reports from tax authorities clarifying enforcement mechanisms and compliance requirements for the new rules.
- Market data tracking changes in crypto trading volumes and liquidity if and when the Act’s provisions are implemented.
The PARITY Act represents a significant step toward harmonizing crypto tax treatment with traditional markets, addressing long-standing regulatory gaps. However, key details about implementation and impact remain unresolved, leaving open questions about how the crypto ecosystem will adapt. The balance between reducing tax-driven speculative trading and fostering broader crypto adoption will be central to the Act’s ultimate effect on market structure and investor behavior.
Source: https://beincrypto.com/new-us-crypto-tax-law-parity-act-proposal/. This article is based on verified research material available at the time of writing. Where information is limited or unavailable, this is stated explicitly.