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The mechanism is not entirely worked out but the symptoms occur early on in the infection without the congestion of the nasal membranes that occur in colds and flu and the inflammation associated. There is some suggestion that it may be an effect on the nerves that are used to conduct smell. Here is a paper discussing this.
Anecdotal and preliminary evidence from multiple institutions shows that these patients present with a sudden onset of anosmia without rhinitis. We aim to review the pathophysiology of anosmia related to viral upper respiratory infections and the prognostic implications. Current evidence suggests that SARS-CoV-2-related anosmia may be a new viral syndrome specific to COVID-19 and can be mediated by intranasal inoculation of SARS-CoV-2 into the olfactory neural circuitry. The clinical course of neuroinvasion of SARS-CoV-2 is yet unclear; however, an extended follow-up of these patients to assess for neurological sequelae, including encephalitis, cerebrovascular accidents, and long-term neurodegenerative risk may be indicated.