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The crypto market is down 46% from its all-time high in May, but savvy investors are celebrating the price drop.
Because the IRS classifies digital currencies like bitcoin as goods, losses on crypto holdings are treated very differently from losses on stocks and mutual funds, according to Onramp Invest CEO Tyrone. Ross. With crypto tokens, the wash sale rules don’t apply, which means you can sell your bitcoin and redeem it right away, whereas with a stock you will have to wait 30 days to redeem it.
This nuance in the tax code is absolutely huge for crypto holders in the United States
On the one hand, this paves the way for harvesting tax losses.
“One thing savvy investors do is sell at a loss and buy back bitcoin for a lower price,” said Shehan Chandrasekera, CPA and head of tax strategy at crypto-tax software company CoinTracker.io. “You want to look as poor as possible.”
The more losses you can accumulate, the better for the long-term investor.
“You can harvest an unlimited number of losses and carry them forward for an unlimited number of tax years,” Chandrasekera added.
Since the wash sell rule does not apply, investors can harvest their crypto losses more aggressively than with stocks, as there is no pre-defined waiting period.
“I see people doing this every month, every week, every quarter, depending on their level of sophistication,” he said. “You can collect so many from these losses.”
The accumulation of these losses is how investors ultimately compensate for their future gains.
When an individual goes to liquidate his crypto stake, he can use these collected losses to reduce what he owes the IRS through capital gains tax.
Another key part of the equation is the rapid redemption of cryptos. If timed correctly, buying on the downside allows investors to gain the upper hand, should the digital coin’s price rebound.
So suppose a taxpayer buys bitcoin for $ 10,000 and resells it for $ 50,000. This person would face $ 40,000 in taxable capital gains. But if that same taxpayer had already reaped $ 40,000 in losses on previous crypto transactions, he would be able to offset the tax he owes.
It’s a strategy that is gaining traction among CoinTracker users, according to Chandrasekera.
But he warned that careful bookkeeping is essential.
“Without detailed records of your transaction and the cost base, you cannot justify your calculations to the IRS,” he warned.
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