A young woman walks past a Bitcoin icon in the window of a blockchain application service company.
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Bitcoin took a beating in December – but that price drop opens up a tax loophole for investors.
The cryptocurrency has lost about 18% this month through Thursday, with prices dropping to around $47,000 per coin. Investigate US Covid cases in the US is a major catalyst for the drop, extending to other popular cryptocurrencies like ethereum.
However, crypto investors can capitalize on that loss in a way that stocks, mutual funds, and other investors cannot. That’s because the so-called wash and sell The rules do not apply to cryptocurrency transactions.
Cryptocurrency investors get a double profit from this deal.
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First, they can sell crypto at a loss and claim tax benefits. (That benefit comes through harvest and lose tax, which allows investors to use losses to reduce or eliminate capital gains taxes on winning investments that are sold for a profit.) Second, investors can quickly buy back cryptocurrencies which they sold to capture any rally in price – which is not too far-fetched given the volatility of the cryptocurrency.
The first benefit is widely available to investors, but the second is not due to wash selling rules. Anti-abuse rules prevent securities investors from purchasing an identical or similar security within 30 days before or 30 days after the sale without penalty.
“It allows you to fully manipulate [crypto] on the downside and use it to generate a tax [benefit]”Leon LaBrecque, a certified accountant and financial planner at Sequoia Financial Group in Troy, Michigan, told CNBC.
Of course, many bitcoin and other crypto investors may not suffer a loss on their books. Despite bitcoin’s recent plunge, the coin is up around 62% in 2021 through Thursday – more than twice the return of Bitcoin. S&P 500 Index This year.
The IRS treats cryptocurrencies as assets, not securities (like stocks or bonds), which is how the asset class escapes the sell-off rules under current law.
While the dual benefit applies to cryptocurrencies like bitcoin, ethereum, and dogecoin, it will not be for investors in crypto-related securities.
“You can’t avoid washing your face with [crypto platform] Coinbase“, LaBrecque said. But obviously you can dodge money laundering with crypto. “
However, Congress may soon close this tax loophole.
The State-passed Rebuild Better Act, a package that invests approximately $1.75 trillion in social programs and climate change mitigation, will follow crypto transactions subject to wash sale rules. The law has stalled in the Senate amid the objections of Senator Joe Manchin, DW.Va., an important swing vote in the equally divided chamber.
Some elements of the law may change during negotiations.
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Investors looking to take advantage of a crypto tax loophole can also inadvertently violate existing rules if they are not careful.
Jeffrey Levine, CFP, accountant and chief planning officer at Buckingham Wealth Partners, based in St. Louis, told CNBC.
Essentially, the IRS wants an investor to take some of the economic risk on the sale — which means some risk of loss, Levine said.
Investors who hit the sell bitcoin button and buy it back a second later risk the IRS negating the tax benefit. But time is not black and white.
“Time is always your best argument,” says Levine. “But given the volatility and the fact that it’s constantly trading, I think you have more flexibility with crypto than with anything else.
“One day is more than enough,” he added. “I feel comfortable defending that against the IRS.”
Even if cryptocurrencies are eventually subject to sell-off rules, investors can solve them by quickly establishing positions in another coin without difficulty.
According to Ivory Johnson, CFP, founder of Delancey Wealth Management in Washington, DC, cryptocurrencies are quite different from selling bitcoin and then quickly buying ethereum.
“The analogy begins and ends with coins being exchanged on a blockchain,” Johnson told CNBC. “Using that logic, stocks traded on an exchange, NYSE or otherwise, are not considered one and the same.”
