It’s no secret crypto currencies have had quite the year, with bitcoin at new all time highs and altcoins slowly climbing their way back. There’s been tons of volatility within these markets and losses are inevitable. What if I told you there was a way that you can turn losses on your crypto holdings into immediate tax savings, while keeping possession of your crypto!
Under section 1091 of the IRS code there is a loophole known as “wash sale rule.â€
A wash sale is when an investor sells a security at a loss to claim a tax write off, only to repurchase nearly the same or the same security within a 30 day time frame. The IRS prohibits these sales, but with crypto currencies being treated as “property†means that they are not subject to a hold period for tax swap sales.
If you are currently sitting with a loss on any individual crypto you may want to consider this loophole before the year end!
If you’ve gone this far that means you’re probably interested on how to do this?
Let me show you how to wash sale your crypto. Let’s say you purchased ETH at $1,200 and that same ETH is worth $600 today. Hypothetically you can sell your ETH before the year ends and gain $600 worth per coin of capital losses. Then you can go ahead and repurchase that same coin at $600 per coin to maintain your position, this is offsetting you loss! Since cryptocurrencies are treated as property, this asset class allows you to harvest tax losses more aggressively than other assets like traditional stocks. With stocks, you have to wait 30 days to buy back the same position. If you don’t wait, the IRS will disallow the loss for tax purposes.
Now how can we feel confident enough that this actually works? Well according to IRS Notice IRS Notice 2014-21 and the FAQs issued in 2019 by the IRS, cryptocurrencies are treated as property. Since cryptocurrencies are not treated like stocks and securities by the IRS, they are not subject to wash sales rules. This allows you to harvest tax losses without honoring the 30-day rule that stocks are subject to. Therefore we can be certain that there is validity in these actions if we decided to do so.
Something you must remember is that there are various fees associated with transferring and or trading crypto. So you’ll want to make sure that the costs are less than what you’ll write off in taxes.
And if you don’t use up all your losses this year, you can roll them forward into future tax years. Now if you don’t have an offsetting gain, you can still take up to a $3,000 loss in the current year.
In order to be on the safe side here are somethings that I would consider before doing anything.
This information is for general tax reasons only! And crypto is still in that weird “gray area†in terms of taxation. So Id strongly advise you to consult a tax professional before conducting a crypto tax swap.
I do have some steps that can help the process if you decided to do so….
Talk to your tax adviser: Tell them what you’re debating on doing and could you use some losses to offset gains on a one-for-one basis? There’s a chance your CPA may not even know this option exists. Consult a tax consulting crypto firm:
* Know your situation: Before you reach out, know which cryptos you own, the quantity, the price you paid, your tax bracket and so forth.
Now if you actually take action and decided to do so here is what you can expect…
This tax loophole allows you to benefit from plunging crypto prices (in the future or the past). And you’ll still be able to keep the same cryptos you started with… just with a new cost on your entry point.
Be sure to act before the end of the year which is right around the corner , if you wanted to use any losses for 2020.
Remember, you don’t have to wait for year-end to employ tax-loss harvesting. You can use this strategy to your benefit at any time of the year.