24K production | iStock editorial team | Getty Images
The crypto market is down 46% from its all-time high in May, but savvy investors are celebrating the drop in prices.
Because the IRS classifies digital currencies like Bitcoin as property, losses on crypto holdings are treated very differently than losses on stocks and mutual funds, according to Tyrone Ross, CEO of Onramp Invest. Wash-sale rules do not apply to crypto tokens, which means that you can sell your Bitcoin and buy it back immediately, whereas with a stock you would have to wait 30 days to buy it back.
This nuance in the tax code is absolutely huge for crypto holders in the US
For one, it paves the way for tax losses.
“One thing savvy investors do is sell at a loss and buy back Bitcoin at 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 make, the better it is for investors in the long run.
“You can reap an unlimited number of losses and carry them forward into an unlimited number of tax years,” added Chandrasekera.
Since the wash sale rule does not apply, investors can reap their crypto losses more aggressively than with stocks because there is no burned-in waiting time.
“I see people doing this every month, every week, every quarter depending on their ability,” he said. “You can collect so many of these casualties.”
By accumulating these losses, investors ultimately offset their future profits.
If a person wants to liquidate their crypto stake, they can use these accumulated losses to lower their debt with the IRS through capital gains tax.
Buying back the cryptos quickly is another important part of the equation. With the right timing, buying the dip will allow investors to resume driving when the price of the digital coin recovers.
Let’s say a taxpayer buys a bitcoin for $ 10,000 and sells it for $ 50,000. That person would face taxable capital gains of $ 40,000. But if the same taxpayer had previously incurred $ 40,000 in losses from previous crypto transactions, they could offset the tax they owe.
According to Chandrasekera, this is a strategy that is resonating with CoinTracker users.
However, he points out that thorough accounting is essential.
“Without detailed records of your transaction and cost base, there is no evidence of your calculations to the IRS,” he warned.