Have you heard about the Bitcoin tax break? The bitcoin crash opens the door to a tax loophole for investors.
Everything started with a recent plunge in prices, but that sell-off has a silver lining: It opens the door to a money-saving tax strategy. Popular cryptocurrencies like bitcoin and ethereum shed more than half their value recently.
Let’s have an example:
Imagine yourself as a bitcoin investor who bought at the (around $65,000) and sold low (near $30,000) would have lost 54%, lot of money? Of Course!.
In your income taxes, Crypto losses are not the same as stocks and mutual funds. That’s because so-called wash sale rules don’t apply. It offers two benefits to crypto investors:
- They can sell crypto for a loss and then use that loss to reduce or eliminate capital gains tax on winning investments.
- Then, they can quickly buy back the crypto they sold to not miss out on a subsequent rebound in price.
The first benefit (called “tax-loss harvesting”) is allowed for stocks and other securities. However, the second benefit isn’t — stock investors aren’t allowed to buy the same or similar security within 30 days before or 30 days after a sale without triggering penalties. -“This is a loophole.”
The so-called loophole exists because regulators don’t consider cryptocurrencies to be “securities.” Instead, the I.R.S. taxes them as property. According to financial advisors, the tax treatment could make a big difference for an asset as volatile as cryptocurrency has been in recent weeks.
Now, let’s retake the example of you, a bitcoin investor who bought high and sold low, incurring a $35,000 loss. This year, you sell stocks and mutual funds for a $35,000 gain. The bitcoin loss would erase taxes on the capital gains. Further, you could have re-bought bitcoin quickly near its $30,000 low and participated in any run-up. Its price jumped more than 10% on Monday. Some bitcoin bulls expect the asset to reach $100,000 by year-end. By comparison, a stock investor would miss out on 30 days of potential gains after a sale due to the wash sale rules.
Curious? Are you interested in cutting your income taxes this year? Let’s discuss more in a strategy session. Book Your Free Tax Assessment Here.