Although the crypto market has experienced a banner 2021, we’ve also seen some of the biggest plunges in crypto since the 2017–2018 Crypto Winter…

Bitcoin alone fell as much as 53%… Ethereum declined as much as 57%… Ripple dropped as much as 73%… and Avalanche and Polkadot both plunged as much as 77%.

And for many crypto holders, the volatility has been too much to stomach…

Some joined the larger sell-off and cashed out… others anxiously watched their portfolio and looked for ways to recoup or limit their losses.

Here at PBRG, we know crypto volatility as par for the course on the way to outsized 10x, 50x, and even 100x returns…

Here’s what Daily editor Teeka Tiwari told readers back in May as crypto prices plunged and bitcoin was down about 53%…

You DO NOT sell into weakness. That’s a no-no. That’s a sheep move. If you decide you want to trim some exposure (and I don’t recommend that), then you do it into strength.

The golden rule of bull markets is to sell into strength when you must and buy into weakness when you can. That’s the blueprint for how you get rich from a powerful trend.

That is why I want you to view this pullback as a gift.

Today, many coins across the greater crypto ecosystem have recovered much of those losses, and have even set new all-time highs…

So, if you took our advice and held through the volatility of the last six months, stay the course… These losses will only be a blip on the radar as we keep hitting new record highs down the road.

But if you find yourself in a situation where you may have bought in at an inopportune time, and you’re wondering if there’s anything extra you can do with your losing positions, I have good news…

There’s a way to turn your crypto losses into immediate tax savings – while essentially keeping possession of your crypto.

It involves a part of Section 1091 of the IRS code known as the “wash sale” rule.

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.

However, this rule doesn’t cover cryptos, which are treated as “property.”

This means they’re not subject to a holding period for tax-swap sales.

So, if you want to take advantage of current crypto losses in a taxable account, you should consider this option.

Today, I’ll show you how. But first…

How to “Wash Sale” Your Cryptos

I wanted to find out why conducting a wash sale now would be good for crypto owners.

I spoke to Shehan Chandrasekera, head of tax strategy at CoinTracker. His company uses software to track crypto portfolios… calculate capital gains and losses… and harvest tax losses with a click of a button.

Shehan is one of a handful of CPAs in the U.S. recognized as an expert on crypto taxation.

Here’s what he told me:

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 $3,500.

In this hypothetical, you can sell your ETH right now to harvest $1,000 worth of capital losses per coin. And you could quickly get back into the same position at $1,000 per coin to maintain your position.

Since cryptocurrencies are treated as property, the asset class allows you to harvest tax losses more aggressively than stocks. (With stocks, you must wait 30 days to buy back the same position. If you don’t wait, the IRS will disallow the loss for tax purposes.)

Keep in mind that there are various fees associated with transferring and trading crypto… So you’ll want to make sure 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. And 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 falling crypto prices (in the past or future). You’ll still be able to keep the same cryptos you started with, as you can immediately re-buy with a new 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.

There’s also some potential urgency here…

The Build Back Better Act, which has been passed by the House, would treat cryptos just like stocks in terms of wash sale rules. If passed by the Senate, and signed into law by the President, the bill would go into effect in 2022.

So this may be your last opportunity to capitalize on the crypto wash-sale rule.

Regards,

Grant Wasylik
Analyst, Palm Beach Daily