Tax-Loss Harvesting for Crypto

tax-loss harvesting crypto

Oh no, Bitcoin just tumbled down 20%! What are you going to do? Tax-loss harvesting, obviously. This is a great opportunity to reduce your future tax burden (that is if you ever sell your crypto at all).

This isn’t financial advice, because I don’t do that here. But if you were asking me for *educational* purposes, I would consider tax-loss harvesting.

Tax-Loss Harvesting is Typically a Stock Tactic

This is a tax approach rich people use to minimize their tax burden at the end of the year.

Typically, December roles around and they or their financial advisors are looking at their investment portfolio. Some investments went up and some went down. If they sold any of the ones that went up, they’ll incur a capital gains tax (the amount of tax depends on how long they held it and their current tax bracket).

How do they reduce those taxes? By also selling some of their loser stocks and realizing those losses.

E.g. they bought Apple, it went up, and they sold. They made $1000. Then they bought Amazon and it went down, so they’re down a $1000 dollars.

If they didn’t sell Amazon, they would have to pay taxes on the Apple gains. But if they sold Amazon, their gains are wiped out on their taxes and they pay nothing.

Cool, what’s the catch?

What you can’t do is sell a stock for a loss and then immediately turn around and buy it. That’s called a wash sale. To avoid a wash sale, you have to wait 30 days before buying the same stock again.

What About Crypto?

Short answer: we don’t know yet. The IRS isn’t clear about it yet.

If you’re buying a Bitcoin ETF, then no. You’re not buying Bitcoin. You’re buying a derivative subject to the same taxable rules as stock.

Crypto sales are taxed (in the US) as a capital asset. So it’s the same rate as if you were buying and selling stock—it depends how long you hold it and your current tax bracket. But it’s not stock, so it technically doesn’t fall under the same wash sale rule.

However, some people choose to wait 30 just in case to avoid any kind of legal trouble. At this stage, that doesn’t seem strictly necessary, but more of a better-safe-than-sorry step. #NotLegalAdvice

The trouble with crypto is its inherent volatility. So while you may want to sell at the bottom to lock in some losses to offset your gains elsewhere, it’s super risky to not buy back in over the next 30 days. Bitcoin moved 10s of thousands in just a few weeks and it would seriously suck to watch that happen from the outside.

If you wanted to play it risky, and hot dang this is one million percent not advice, you could sell your crypto at a loss and then buy back in immediately.

Honestly, treat this as a loophole which will probably get closed soon. There’s a chance it gets closed this year before even get to exploit it—but while it’s here, you can gamble on those tax advantages.

How I Plan to Use Tax-Loss Harvesting

I moved a large amount of money out of crypto recently for a specific stock play. It will end up being out for a few weeks. In my unique situation, I plan to buy heavy into Bitcoin again once my stock play is done. I still believe Bitcoin is getting to $100,000 by the end of 2021 so I would buy in even if it were at $80,000.

Let’s say my stock play finishes and I’m ready to buy back into Bitcoin—except it’s only been 28 days. I’m personally willing to risk waiting two days to buy into Bitcoin in order to lock in any capital gains offsets.

Again, this is unique to me. A lot of wealth-building tactics are. This may not apply to you, but hopefully it prompts your thinking and gets you to think about how you can maximize your own situation.

And for goodness’ sake, this is not financial advice. Amen.


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