Getting paid for crypto losses

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Getting paid for crypto losses
David Gardner for the camera
David GardnerFor the camera

The first seven months of the year have been disastrous for most cryptocurrency owners. Estimates from coinmarketcap.com detail the extent of the losses. The global market capitalization of crypto assets, including cryptocurrencies and stablecoins, approached $3 trillion in November last year. It’s trillion with a “t”. By global market capitalization, I mean the total value of significant crypto assets in existence.

By the time Super Bowl ads featuring Hollywood A-Listers were airing for crypto wallets, crypto had begun its decline. Now, the same source estimates the total crypto market cap to be close to $1 trillion, down two-thirds in just over six months. Top-tier cryptocurrencies like Bitcoin and Ethereum saw similar declines.

There is nothing we can do to recoup past losses. Crypto assets could experience a strong resurgence in the second half of the year, but their value is what another buyer will pay for the asset. There is a silver lining to the crypto cloud in the form of the US tax code. For now, it looks like crypto owners could benefit from a loophole giving them tax benefits.

Experienced investors will recognize the tax-loss harvesting strategy that is commonly used with stocks, mutual funds, ETFs, and other more traditional financial assets. It applies to investments in your taxable accounts. When the value of a given financial asset is less than what you paid for, you are usually able to sell that asset and incur a capital loss. Investors appreciate capital losses because they can be used to offset capital gains from other assets in the current year or future years. You can also reduce ordinary income by up to $3,000 per year, which is even more useful because it reduces income that is usually taxed at a higher rate.

One of the pitfalls of capital loss harvesting is the wash sale rule. You cannot sustain a capital loss on the same asset (or a substantially identical asset) that you bought in any account in the last 30 days or that you will buy in the next 30 days. If you sell a stock, you cannot incur a loss on that stock if you bought it four weeks ago or if you buy it in four weeks. That’s why tax loss recovery strategies can be complex if you want to keep your investment.

Cryptocurrencies belong to a completely different category of financial assets. According to IRS Notice 2014-21, “virtual currency is treated as property. General tax principles applicable to real estate transactions apply to transactions using virtual currency. securities, not property.

If crypto-assets are not subject to the wash sale rule, crypto investors have a significant advantage. Let’s say you bought Bitcoin late last year on a non-retirement account for $65,000, then recently you sold that single coin for $25,000. On the same day, you buy a coin for the same $25,000. It looks like you could suffer a short-term capital loss of $40,000. The loss can be used to offset other capital gains and up to $3,000 of ordinary income, as mentioned earlier. Unused losses could be carried forward to future years. This could reduce your taxes by $8,000 or more, depending on your personal circumstances.

Please be aware that this law may change at any time and your tax preparer may not agree with this interpretation. Consider this column an ​​introduction to the idea of ​​crypto loss harvesting. You should retain the services of your own tax advisor to execute this strategy, particularly if the numbers involved are large. If you want to be on more established legal ground, you can sell Bitcoin and with the proceeds immediately buy Ethereum – a different asset. This is very unlikely to be considered a bogus sale. Finally, remember that you could just keep the money from your Bitcoin sale and safely enjoy the tax benefit.

David Gardner is a Certified Professional Financial Planner with Mercer Advisors practicing in Boulder County. The opinions expressed by the author are his own and are not intended to serve as specific financial, accounting or tax advice. They reflect the author’s judgment at the date of publication and are subject to change. Cryptocurrencies are a highly speculative investment that involves a high degree of risk. Investors must have the financial capacity, sophistication/experience and willingness to bear the risks of such an investment, and a potential total loss of principal invested.

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