Why Crypto’s Losses Present an Opportunity

Since May 2021 Bitcoin (BTC) has tumbled from its all-time highs, as have other cryptocurrencies. Although this is not ideal for investors, the downturn may present an opportunity. The IRS currently classifies cryptocurrency as property. Therefore, at the moment, taxes on crypto sales are subject to the same capital gains and losses as that asset class.

Notably, this means that crypto escapes a well-known rule that applies to financial securities: the “wash-sale rule.” One option investors might consider for cryptocurrency positions at a loss is to sell the asset and then immediately buy it back — recording the loss for tax purposes, but remaining invested in the asset.

How the “Wash-Sale Rule” Makes Stocks Different

Securities, like stocks, are subject to a specific rule concerning their sale and immediate buyback, as it applies to taxable losses. Investors that want to sell stock at a loss and count that against capital gains must wait 30 days before buying back the same asset or one that’s substantially similar. This “wash-sale rule” came into effect as a result of the IRS objecting to people “gaming the system” by securing losses that offset taxes.

The goal of the rule is to prevent “artificial losses” tied into investing and taxable income. The wash-sale rule applies to stocks, bonds, ETFs, and other financial instruments that are traded on exchanges. Currently, cryptocurrency remains unaffected by the 30-day window.

Crypto Loophole Remains For Now

Investors may find the current tax laws governing cryptocurrencies advantageous concerning a strategy known as tax-loss harvesting. Assets sold at a loss can be used to offset capital gains elsewhere. With crypto prices potentially below where investors bought them, selling in order to harvest the loss can be done without worrying about the wash-sale rule implications.

For those planning to remain invested in cryptocurrency over the long term, immediately buying back that same asset retains the position while positioning the loss against capital gains. Analysts note it’s possible legislation will forbid this practice in the future, much in the same way the IRS broadened its definition of a “wash sale” in 1993. But for the time being, this unique aspect of crypto investing could provide an opportunity when it comes to taxable gains.

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