Breaking the Code: Tax Loophole for Crypto Losses
By: Jeffrey M. Krueger, CPA, MSA, CFP®
With the recent volatility in the crypto markets, some investors are benefiting by harvesting losses as the underlying crypto asset drops in price. Unlike stocks and mutual funds, crypto currencies are treated as “property” as opposed to “stocks and securities.” Therefore, wash sale rules, which prevent investors from using losses on a stock that they have bought back within 30 days, do not apply.
This opens an opportunity in the tax code for crypto investors to sell their crypto holdings if there is a drop from their original purchase price and immediately buy it back. This allows them to still participate if the price rebounds (without waiting the 30 days, like stocks), while locking in tax losses that can be used to offset other capital gains and/or up to $3,000 of other income.
As an example, let’s say an investor purchase 1 bitcoin at a $40,000 price. If the price dropped to $30,000, this investor could have sold his 1 bitcoin and immediately bought it back, resulting in a $10,000 capital loss. If the crypto rebounded to $45,000, the investor would be up $5,000 in total, but his tax return would show a $10,000 loss.
Where investors may be purchasing multiple crypto currencies and in multiple lots, keeping accurate records (purchase details, sales details, transfers, etc.) is vital to be able to substantiate the calculations to the taxing authorities.
To ensure compliance with the requirements imposed on us by IRS Circular 230, we inform you that any tax advice contained in this communication (including any attachments) is not intended to and cannot be used for the purpose of: (i) avoiding tax-related penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.