Lose big on crypto? Here’s how to reduce the sting

Bitcoin, for example, is trading about 65% below its all-time high, which it hit just nine months ago.

If you bought a cryptocurrency when it was on the rise and sold your holdings this year — or are considering doing so — there are at least a few ways you can lessen the sting of your loss.

You can use a capital loss in crypto to offset any capital gain you realized this year – even if it came from selling another security or another property, such as B. a stock or a house.

Let’s say you bought Bitcoin for $50,000 in February 2021 and then recently sold it for $24,000, which is roughly where it is today. You would have a long-term capital loss of $26,000 because you held the investment for at least a year.

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Then say you also booked a $10,000 capital gain by selling a long-held stock in a taxable brokerage account (i.e., not a tax-advantaged account like a 401(k) or IRA).

You can fully offset taxes due on your $10,000 capital gain against $10,000 of your capital losses on your 2022 tax return. In addition, you can use your losses to offset taxes owed on up to $3,000 of your ordinary income that year.

Any losses that you don’t use up this year can still be used in the years to come. So, using the example above, you would use half of your capital losses this year ($13,000) to recoup your losses $10,000 capital gain and $3,000 income. Then you can carry the other half of your losses forward into future years. And if you have a year where you don’t have any winnings to offset, you can still use $3,000 of your losses to offset taxes on $3,000 of your income.

But when you die, your losses die with you for tax purposes. You cannot give them to someone else to use. “Your heirs don’t inherit the losses,” said Larry Pon, a California-based chartered accountant and board-certified financial planner.

Wash sale rules don’t apply to crypto…yet

Unlike stocks, you can choose to sell a loss-making crypto asset to claim the tax loss, but then buy the same asset again around the time of the sale.

Here’s why: For tax purposes, crypto assets are classified as property, not securities. So while you can use capital losses from either type of asset to offset your own gains, there is a different tax rule that only governs securities and does not apply to crypto assets. At least not yet.

It’s called the wash sale rule. The IRS will deny any capital loss you claim when you sell a stock or security if you repurchase it or something “substantially identical” to it within 30 days of the sale or before.

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There is no comparable rule for crypto. “Although the IRS has not specifically addressed the area, most practitioners believe that the wash sale rules do not apply to crypto in general. The IRS has stated that it treats virtual currencies as property, while wash sale rules apply to crypto stocks and securities,” said Mark Luscombe, senior federal tax analyst at Wolters Kluwer Tax & Accounting.

So if you post a loss but still think the same crypto asset has long-term promise, you can always buy it back. Even the same day you sell.

“If you sell [a cryptocurrency] and buy back quickly, allowing you to tax losses without triggering the 30-day rule,” said Kell Canty, CEO of crypto tax software provider Ledgible.

This trading advantage over stocks may not last forever. Legislators have already suggested extending the wash sale rule to crypto and other assets in proposed legislation. But the chances of that expansion happening this year are very slim.

“This rule may change in the future, but for 2022, crypto assets are not subject to the wash sale rules,” Pon said.

An exception may be if you have indirect exposure to crypto assets, e.g. B. through an exchange traded fund that is traded on a stock exchange such. B. the ProShares Bitcoin ETF (BITO).

“Trading on an exchange could allow the IRS to treat such cryptos as securities and [therefore] subject to wash sale rules,” said Luscombe.

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