Bitcoin peaked at its price in May but instantly fell to lower levels. Another cryptocurrency also followed the trend. However, this was not a unique moment as this was not the first time that this occurred, and it will not be the last. While some investors perceive this as a stressful situation, others find this great potential as an additional investment opportunity in cryptocurrency. The IRS categorizes digital currencies such as Dogecoin, Ethereum, Bitcoin, or even Shiba Inu as property. Crypto investors must pay for capital gains and losses that apply to other investors. However, there is one significant difference. This difference lies in the “wash sale” rule. Cryptocurrency investors can take advantage of this loophole when tax payment comes. Contrary to other investors who are into securities, crypto investors can use tax-loss harvesting. If you want to take advantage of the tax-loss harvesting rules, you have to know which ones are allowed or not. To help you understand, this article will share the following concepts: tax-loss harvesting, wash sales, the Wash Sale Rule, and the possibilities for cryptocurrency investors.
Definition of a Wash Sale
A wash sale happens when an investor sells or trades a security at a loss and then purchases similar security after a short period (When an asset is disposed of at a fair market value below that of the original cost, then sold at a loss happens). Investors utilize wash sales to take advantage of the maximum allowable tax deductions after selling at a loss. For instance, an investor could apply for loss in tax purposes yet maintain to invest in the security if he repurchases security at the start of the new year that he has sold at the end of the previous calendar year. The IRS Hampered this practice by mandating the Wash Sale Rule with similar methods in working around the tax system.
Deciphering the Wash Sale Rule
The wash sale rule does not permit a deduction from tax due to the loss of a sale or other disposal of securities or stock if the investor purchases the same or similar asset within the 30-day window before or after the sale. If an investor decides to repurchase within the 30-day window the same or similar security or stock, this will forfeit the person’s potential to apply for a deduction of the loss. This will enable one to have a lower fee for capital gains taxes if an investor decides to sell the new stock later. The Wash Sale Rule aims to eliminate so-called losses and remove tax laws manipulation by engaging in stock trading to claim harvest capital losses to offset income or capital gains. Assets are categorized as securities, investments like ETFs, stocks, bonds and other traded financial instruments apply to the wash sale. Currently, cryptocurrencies do not meet the criteria. Thus, several crypto investors grab the chance of the pronounced volatility of different digital currencies by selling a position to claim capital loss and instantly buy it again without losing airing to the cryptocurrency. For instance, if you bought Bitcoin this 2021 and settled for a $10,000 cost basis. If the bitcoin decreases its worth by 60% and you decide to sell your coin, you will have a $6,000 capital loss. This capital loss offset capital gains, with an unutilized balance decreasing regular taxable income by up to $3,000 for the calendar year. The unused balance will be prepared to offset subsequent taxable income or capital gains until fully utilized. If you want to continue investing in bitcoin, you could buy these same coins promptly after selling them, declaring them a loss but holding this crypto in your portfolio. If you plan to do the same scheme with a stock position that you own, this capital loss will not be permitted under the wash sale rule and will stop you from offsetting any taxable income or capital gains.
Tax-Loss Harvesting Defined
The sale of investments at a loss and utilizing the loss to offset capital gains constitutes tax-loss harvesting. Crypto investors can still use this tax-loss harvesting strategy with securities to decrease taxable capital gains even with the wash sale rule. This is applicable when an investment is sold at a loss with the plan to buy it later outside the 3-day window of the wash sale rule mandated by the IRS. If you want to know more about cryptocurrency trading platforms, stick to the highly recommended platforms from crypto experts across the board. Some of the platforms, such as Kraken, Binance, and the Bitcoin Loophole app, have already earned quite a reputation along with loyal traders. However, this does not work with cryptocurrency. Cryptocurrency is excluded from the wash sale rule. The good news is that there are other alternatives when using a tax-loss harvesting strategy. For instance, you bought a bitcoin position for $10,000 and kept the asset for 18 months. Assuming that the coin decreased by fifty percent during this holding period, you have a capital loss of $5,000 and a position with a value of $5,000. Your option is to sell your stake and accept a $5,000 capital loss. To avoid the wash sale rule, you must observe the 30-day window if this was a stock or other security. However, you can reestablish the position by instantly repurchasing crypto for the same $5,000 since it is not categorized as security for wash sale rule purposes.
Conclusion
Because of the booming trend of cryptocurrencies, Congress is deliberating on a tax law change that would include the wash sale rule for cryptocurrencies. Checking on this tax loophole would enable the IRS to obtain revenues from this booming asset class. If you are interested in locking in capital losses, you could buy your holdings again before the end of the year to do away with the wash sale rule. Comment * Name * Email * Website
