2022 has been a painful year…
Fortunately, there’s one thing you can do today to alleviate some of that pain.
I understand if you’re skeptical. After a bull run for the ages in 2021, stocks entered a full-blown bear market this year.
And the bond market saw a massive 17% drop thanks to rising interest rates.
We’ve also seen some of the biggest plunges in crypto since the 2017–2018 Crypto Winter…
Major cryptos like bitcoin and Ethereum are down over 75% from last year’s peak. Smaller crypto projects have fared worse.
And that was before the recent implosion of FTX and other crypto lending platforms.
Fortunately, if you hold your crypto on an exchange, you can turn your losses into immediate tax savings…
In fact, just a few minutes could lead to savings of over $1,000 on your taxes this year.
That’s because the IRS allows you to take $3,000 of losses against ordinary income over the course of a year. And depending on state and local taxes, reducing your income by $3,000 could easily add up to over $1,000 in savings.
What’s the best way to do this?
Sell your crypto holdings and book the loss.
But then – and here’s the twist – you can buy your crypto right back.
The Crypto Loophole to the Rescue
Unlike stocks, Section 1091 of the IRS code, known as the “wash sale” rule, doesn’t apply.
A wash sale is when an investor sells a security at a loss to claim a tax write-off… only to repurchase the same (or nearly identical) security within 30 days of the sale.
The IRS prohibits such sales with stocks. If you sell off a poorly performing stock now, you’ll need to wait 30 days to buy it back. Otherwise, you don’t get the tax benefit from the loss.
But that’s not the case with crypto…
Since the IRS still treats cryptos as “property,” it’s not subject to a holding period for tax-swap sales.
So, you could sell off crypto, book thousands of dollars in losses… and then immediately buy your holdings back.
The only exception is crypto you hold privately – like in a personal wallet – as opposed to an exchange…
But if you want to take advantage of current crypto losses in a taxable account, you should consider this option.
As Shehan Chandrasekera, head of tax strategy at CoinTracker, states:
According to 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.
Here’s an example of how a wash sale works…
Say you purchased Ethereum (ETH) at $4,500, and now it’s only worth $1,500.
In this hypothetical, you can sell your ETH right now to harvest $3,000 worth of capital losses per coin. And you could quickly buy it back at $1,500 to maintain your position.
Keep in mind that there are fees associated with transferring and trading crypto… So, you’ll want to ensure these costs are less than what you’ll write off in taxes.
And if you don’t use up all your losses by the end of the year, you can roll them forward into future tax years.
So if you don’t have an offsetting gain, you can still take up to a $3,000 loss in the current year.
Three Steps to Help You Get Started
Remember, this information is for general tax purposes only. And… crypto is still somewhat of a “gray area” in terms of taxation.
We strongly encourage you to consult a tax professional before conducting a crypto wash sale.
But if you want to consider this strategy, here are some steps to help with the process:
-
Talk to your tax adviser: Tell them what you’re contemplating. 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 avenue exists.
-
Consult a tax consulting crypto firm: CoinTracker is one option. ZenLedger is another.
-
Know your situation: Before you reach out, know which cryptos you own, the quantity, the price you paid, your tax bracket, etc.
This tax trick allows you to benefit from the current Crypto Winter.
You’ll still be able to keep the same cryptos you started with, as you can immediately repurchase them at a new – and far lower – cost basis.
And you don’t have to wait until year-end to employ tax-loss harvesting. This tax planning strategy can work at any time.
Remember, crypto volatility is the price of admission for life-changing crypto gains… but if you’re looking to recoup or limit your crypto losses, a wash sale might be right for you.
So consider selling some of your beaten-down cryptos before the end of the year… and buying them back at a lower price. (And make sure to consult your tax adviser before doing so.)
Just remember, if you’ve been following Teeka’s advice to keep your crypto off of an exchange, you won’t be able to apply this strategy without first moving it onto an exchange
Good investing,
|
Andrew Packer
Analyst, Palm Beach Daily
P.S. A wash sale could help you reduce your tax bill during this bear market… But if you want to protect your money against long-term inflation, you need to think outside the box.
That’s why Teeka recently held an Inflation Survival Summit detailing three of his favorite inflation-proof opportunities.
Click here to learn more… and you’ll even get details on his No. 1 inflation-proof investment with 25x growth potential in the next two years.