Cryptocurrency Tax Loss Harvesting - Now May Be The Time To Act
While we don’t specifically recommend crypto currencies in our client’s portfolios, we recognize that many people own these assets on their balance sheet. Given the huge rise in price across the crypto marketplace since January of 2021 and subsequent crash back down to roughly January 2021 levels, there is a tax planning opportunity that you may want to take advantage of.
If you are currently at a loss on any of your cryptocurrency holdings (i.e. you bought between January 2021 and June 2021), you may have a tax loss harvesting opportunity due to the lack of wash sale rules regarding crypto trades.
There is an interesting tax loophole right now because there are currently no wash sale rules for cryptocurrencies. Therefore, you can sell your holdings and immediately buy back to realize the loss…even though you’re buying the exact same holding.
Why would you do this? Depending on when you purchased, you could have substantial losses on your crypto portfolio. For example, let’s say you bought $10,000 of Bitcoin (BTC) near the high at $60,000 per BTC. Today, that’s trading around $30,000 per BTC (as of July 9, 2021). You could sell today, book the $30,000 per BTC loss and buy back in tomorrow. Essentially, the IRS is giving you an opportunity to reduce your cost basis, take a loss, yet not force you to miss any subsequent appreciation if the price recovers.
If you do this, you may want to sell one day and buy back in the next day so that you don’t have 2 transactions within a few minutes. Note that this is only true for ownership of the actual crypto itself and does not apply to a crypto ETF, for example, because an ETF is classified as a “security” which follows the same rules as a stock, bond, or ETF/mutual fund investment.
When you purchase a stock, bond, ETF or mutual fund -anything classified as a security- wash sale rules apply:
Let’s say you purchased ABC stock at $60 per share some time ago and today it’s worth $40 per share. In order to lock in the $20 per share loss you would have to sell ABC stock. Why would you do this? Because that $20 loss can be used against gains elsewhere in your portfolio or even to offset other portfolio income such as dividends.
Wash sale rules make this a bit more complicated because there is a 60-day window surrounding the sale of your ABC stock. If you sold your ABC stock today and bought back in tomorrow, you would have a ‘disallowed loss’ and you wouldn’t be able to write off the loss against gains. According to the rules, you could only buy back ABC stock after 31 days to be able to apply the loss against gains elsewhere in your portfolio. In this case, it’s typically standard practice to buy a different stock after selling so that you can stay in the market yet lock in the loss for tax purposes.
A few other things to note:
Remember, you can apply an unlimited amount of losses against and unlimited amount of gains. And if you don’t have gains to offset these losses, the deferred loss carries forward on your taxes indefinitely. In addition, if you don’t have gains to offset realized losses, you can write off a maximum of $3,000 against your income each year until the loss is all used up.
It’s important to note that this rule is likely to change in the future, the IRS just hasn’t issued guidance on it. Regulators may crack down on this in the future closing this loophole. It’s unlikely that transactions occurring before any regulatory change could be disallowed, but that could happen, too.
We would recommend that you engage a qualified tax professional or CPA before executing this strategy. In the event of an IRS audit, your CPA is who would explain these transactions to the examiner so you will want to make sure you execute the trades in accordance with their guidance.
