Harvesting tax losses aggressively without honoring wash sales could get you into trouble in Australia. Recently, the Australian Taxation Office (ATO) warned taxpayers not to engage in this tactic because it is viewed as a form of tax avoidance.
What are Wash Sales?
A wash sale occurs when you sell an asset for a loss and buy the same or an identical asset back “shortly” after (or before) selling. The wash sale rule is not new in Australia. It came into effect through Taxation Ruling 2008/1.
For example, Jack sells his 1 BTC that has a cost basis of A$40,000 for A$30,000 to harvest a $10,000 (A$40,000 - A$30,000) loss. Jack is still a bitcoin believer so he buys back his 1 BTC for A$30,000 two days later. This transaction is a wash sale since there is no intent of ceasing to have an economic exposure. Plus, the buyback happens “shortly” after you sell the coin at a loss. Unfortunately, the term“shortly” isn’t clearly defined by the ATO either. Generally speaking, many countries believe that purchasing an identical asset within 30 days before or after a sale is a wash sale.
Avoid ATO Audit
You might be thinking how the ATO will know about your wash sales. The ATO has tools to identify wash sales through data shared registries and crypto asset exchanges. If you get caught, the ATO could reject capital losses related to wash sales and impose additional taxes, interest and penalties on you.
If you believe you have reported losses as a result of wash sale transactions in the past, you should contact a local tax advisor or review ATO’s voluntary disclosure process to explore your options.
Applying the Wash Sale Rule Is Not Always Clear
It is not clear whether selling a coin at a loss and shortly buying back the wrapped version of the same coin constitutes a wash sale. wBTC is the wrapped version of BTC. wBTC is an ERC-20 token that allows you to transact in Ethereum-based DeFi platforms.
An argument could be made that wrapped coins are not substantially the same asset because it offers you a different level of utility by enabling features you wouldn’t have otherwise had if you didn’t wrap the coin. On the other hand, regulators could argue that wBTC and BTC are “substantially identical” assets that are subject to the wash sale rule.
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Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.