Many shrewd investors are celebrating the recent decline of digital currency prices. The IRS views digital currency as property, not as an investment stock. For this reason, digital currency investments are not tied to wash sale rules, meaning that an investor is able to sell their bitcoin and then immediately repurchase. Stocks, on the other hand, cannot be repurchased for 30 days.
This seemingly small loophole helps digital currency investors by way of tax loss harvesting. This means that an investor can use their losses to bring down the amount owed to the IRS through their gains. Investors can claim their losses to offset taxable monetary gains.
Shehan Chandrasekera, Head of Tax Strategy at CoinTracker.io warns that immaculate bookkeeping is imperative. He cautions investors by saying, “Without detailed records of your transaction and cost basis, you cannot substantiate your calculations to the IRS.”
With cryptocurrencies there’s a lot that can be done to help reduce tax burdens. Your losses can actually be used to draw down your capital gains taxes. You can also buy some cryptocurrencies and try to capitalize on a quick recovery without having to wait 30 days, which can feel like forever in the world of cryptocurrency.
For example, let’s say you had $100,000 in Bitcoin 2 weeks ago, but the gains from your stock portfolio and other funds earns you $100,000 this year, your Bitcoin losses would offset the taxes you would otherwise be required to pay towards capitals gains.
Suffice to say, we are not tax professionals, and all countries/territories have different rules and regulations, so please seek a local tax professional before making any decisions. Just remember if you are going to try and use these wash sale rules to your advantage, don’t repurchase too soon after your sale. The US Internal Revenue Service can and will prevent you from claiming the tax credits if they suspect anything illegitimate.