Since the global coronavirus pandemic struck last year, the cryptocurrency market has been on a roll. They began to climb steadily in 2020 and didn’t stop in 2021 when space reached an all-time high in May. However, since then, the market has gone down by nearly 46%. Of course, this dip in prices has resulted in losses for many, but there are shrewd investors out there who are actually celebrating this fall in prices. As digital currencies, such as Bitcoin, are categorized as property by the IRS (Internal Revenue Service), the losses that people make on crypto holdings are treated in a different way than those you incur through mutual funds and stocks.
This fact was disclosed by Tyrone Ross, the chief executive of Onramp Invest. The wash sale rules are not applicable to crypto tokens, which means that it is possible for people to sell their bitcoins and buy them back right away. In contrast, if you do this with a stock, you will be required to wait for at least 30 days in order to buy it back. This slight nuance in the tax code has downright huge implications for all cryptocurrency holders in the United States. First and foremost, it opens up the door for tax-loss harvesting.
Ahead of strategy at CoinTracker.io, which is a crypto tax software firm, and a CPA, Shehan Chandrasekera, said that a smart move by savvy investors is selling their bitcoin at a loss and then buying it back at a much lower price. The goal is to look as poor as possible. The more losses people are able to rack up, the better it will turn out for them in the long run as an investor. Chandrasekera said that people would be able to harvest an unlimited amount of losses this way and they would have the freedom of carrying them forward into as many tax years as they want.
Since the wash sale rule is not applicable here, it is possible for investors to harvest their cryptocurrency losses more aggressively as opposed to stock losses, as there is no waiting period baked-in. He said that he had seen people doing so every week, every month and quarter, depending on how sophisticated they are at it. It is possible to collect a lot of losses this way. Investors can accrue these losses and use them for offsetting future gains.
When people decide to liquidate their crypto stake, these collected losses can come in handy for bringing down the capital gains tax they owe to the IRS. Another essential element of the equation is to quickly buy back the crypto they have sold. As long as it is correctly timed, investors can buy the dip and use it to ride back up, as long as the price of the digital currency rebounds. Chandrasekera revealed that this strategy appeared to be catching on amongst users of CoinTracker. However, he added that thorough bookkeeping is vital.