Bitcoin, for example, is trading at about 65% of its peak nine months ago.
If you bought cryptocurrency when it was on the rise and sold your holdings this year — or are thinking of doing so — there are at least two ways you can minimize the sting of your losses.
You can use a capital loss in crypto to offset any capital gain you realize this year – even if it comes from another security or another sale. Assets like stocks or houses.
For example, you bought a bitcoin in February 2021 for $50,000, then recently sold it for $24,000, which is where it’s trading today. You will have a long-term capital loss of $26,000, because you held the investment for at least one year.
In addition, they booked a $10,000 capital gain by selling the long-held stock in a taxable brokerage account (ie, not a tax-deferred account like a 401(k) or IRA).
If you have a capital loss on your 2022 tax return, you can fully offset the tax on the $10,000 capital gain. Additionally, you can use your losses to offset up to $3,000 of your regular income tax this year.
Whatever losses you don’t use this year, you can still use them in future years. So in the example above, you would use it to offset half of your capital loss ($13,000) this year. $10,000 in capital gains and $3,000 in income. You can then carry forward half of your losses to future years. And if you have a year with no profit to offset, you can still use $3,000 of your loss to offset $3,000 of your income tax.
But when you die, your losses die with you for tax purposes. You cannot bequeath them to someone else to use. “Your heirs will not inherit the loss,” says Larry Pohn, a certified public accountant and certified financial planner in California.
Wash sale rules do not apply to crypto…
Unlike stocks, you can choose to sell a lost crypto asset to claim the tax loss but repurchase the same asset during the sale.
Here’s why: For tax purposes, crypto assets are classified as assets, not assets. So while you can use capital losses from both types of assets to offset a gain, there is another tax law that only governs securities and does not apply to crypto assets. At least not yet.
It’s called the Dishwashing Law. The IRS disallows any capital loss if you repurchase or repurchase something similar to the purchase within 30 days before or after the sale.
There is no equivalent law for crypto. “While the IRS hasn’t specified the area, most experts are of the view that the bath sale rules do not generally apply to crypto. The IRS has stated that it views virtual currency as property, but the bath sale rules do apply,” said Mark Luscombe, chief federal tax analyst at Walters Kluwer Tax & Accounting.
So if you book a loss but believe that the same crypto asset holds a long-term term, you can buy it again at any time. On the same day you sell.
“If you sell [a cryptocurrency] And buy it back quickly, allowing you to write off a loss product without triggering the 30-day rule,” said Kel Canty, CEO of crypto tax software provider LadyGible.
This trading advantage over securities cannot last forever. Lawmakers have previously proposed expanding the money laundering rule to cover crypto and other assets in proposed legislation. But the probability of expansion this year is very low.
“This law may change in the future, but for 2022, crypto assets are not subject to wash-sale regulations,” Pon said.
One exception is if you have indirect exposure to crypto assets through an exchange-traded fund like the ProShares Bitcoin ETF (BITO).
“Trading on a stock exchange may allow the IRS to hold such crypto as a security. [therefore] According to Luscombe, under the wash sale laws.