HODLer’s are no stranger to the erratic and volatile fluctuations within the crypto world. This week, when compared to the mid-April Bitcoin peak, HODLer’s of the #1 cryptocurrency would have witnessed a 54% drop in price valuation.
Unfortunately for some, this loss may have proved too much, seeing positions close and investors transfer their funds elsewhere. However, there is a light at the end of the tunnel for some US investors – the ability to offset losses against their tax returns.
Why the wash sale rule doesn’t apply to crypto
The Internal Revenue Service (IRS) prohibits US residents from deducting losses from a wash sale. A wash sale occurs when you sell or trade securities at a loss, and within 30 days before or after the sale, you have purchased a substantial amount of identical securities, acquired a significant amount of identical securities in a fully taxable trade, or acquired a contract to purchase a substantial amount of identical securities.
While the above runs true for stocks and mutual funds, thankfully, cryptocurrencies do not fall under the securities bracket.
Often referred to as tax-loss harvesting, the initial sale of a loss for both securities and cryptocurrencies can be offset against your tax returns. However, the ability to quickly buy back the asset you have sold will incur severe penalties if you are to do so on securities.
Those of you looking to buy back your cryptocurrency quickly can do so with zero penalties – a small loophole found within the current cryptocurrency tax rules.
How does this benefit US investors?
Regulators do not currently consider cryptocurrencies as securities. They are, in fact, taxed as property. With this in mind, and when considering the cryptocurrency market’s volatility, it is fair to suggest that US investors could begin to use their crypto losses to offset against any taxes on capital gains.
For example, a US Bitcoin investor who sold mid-week and incurred a $20,000 loss would be able to offset this against their $22,000 stock gains – removing any applicable taxes. In theory, the same US investor would then be able to buy back the Bitcoin they have just sold, taking advantage of any positive market movement instantly.
If that same US investor wanted to buy more of the stocks they had just sold, they would need to wait 30 days, potentially missing out on some positive price movement.
The small print
While this loophole applies to cryptocurrencies, it is not applicable for crypto-related securities, such as Coinbase.
Furthermore, since this information has become public knowledge, it is highly likely that regulators will begin to review the current rules and regulations surrounding cryptocurrencies.
This, in turn, will promote stricter checks on the adherence to other cryptocurrency rules, including the need for all crypto sales to have economic substance. US investors who sell their losses and buy back instantaneously will run the risk of the IRS negating the tax benefit. The IRS is still within its power to label such transactions as a sham.
Jeffrey Levine, a CFP accountant at Buckingham Wealth Partners, stated, “A day is more than sufficient. I’d feel more than comfortable defending that to the IRS”.