Here’s Why XRP, Chainlink, and Algorand Are Falling

What happened

Many cryptocurrencies — Chainlink (CRYPTO:LINK), Algorand (CRYPTO:ALGO), and Ripple‘s (CRYPTO:XRP) XRP token among them — suffered significant losses on Monday on the heels of new tax rules proposed by Democrats in the U.S. House of Representatives. Those tokens were down roughly 5.7%, 3.3%, and 4.1%, respectively, as of 4:30 p.m. EDT.

As part of the massive infrastructure bill working its way through Washington, House Democrats have put forward a series of potential tax code changes that include raising the top capital gains rate from 20% to 25% and altering classifications that allow crypto traders to take advantage of wash-sale tax law loopholes. The proposed changes would likely result in higher tax liabilities for short-term, high-volume cryptocurrency traders. 

So what

If investors sell cryptocurrency or stock at a loss, they qualify for a capital gains tax deduction. Under the rules that apply to securities, investors have to wait at least 30 days before buying back the stock they previously sold at a loss. Otherwise, the earlier sale is classified as a “wash sale” and is not eligible for that tax deduction. However, the tax setup is a bit different when dealing with crypto.

Because cryptocurrencies are currently classified as property by the IRS rather than securities, they are not subject to the full wash-sale rules. That paves the way for more versatile short-term trading, as traders are able to sell tokens at a loss and then buy back into their positions in less than 30 days, but still take advantage of capital gains tax deductions.

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Now what

While the proposed changes on cryptocurrency wash sales still have significant legislative hurdles to clear before they could go into effect, it’s not unreasonable to think that such a regulatory shift will be instituted at some point. More robust regulation is a core risk factor for cryptocurrency investors.

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The suggested wash-sale change would likely leave some crypto traders with higher tax bills, but the potential shift would have a relatively minor impact for many holders of Chainlink, Algorand, and XRP tokens. It’s probably the potential for subsequent, more disruptive regulatory changes that investors should be more concerned about.