THE CRYPTO DOWNTURN AND THE WASH SALE RULE .
The crypto markets are in a bear market. There’s no way to sugarcoat the fact that crypto markets are having a difficult year. There is, however, a silver lining unique to crypto that tax-savvy investors can use to their advantage.
The term “bear market” is defined as a market that has lost more than 20% in a given year. Bitcoin is down -35% in 2022, ether is down -43% in 2022 and many other coins are down by much more.
In traditional markets, the wash-sale rule stops people from selling an investment for a loss and then quickly rebuying it. But this is the crypto market, impossibility seems to not be a thing .
Assuming an investor has lost money on a crypto position, there’s a unique opportunity to take advantage of these unrealized losses.
What does the wash sale rule mean to start with ? The wash-sale rule prohibits selling an investment for a loss and replacing it with the same or a "substantially identical" investment 30 days before or after the sale.
This rule is designed to prevent people from selling stock to just to claim the tax benefit, without intending to exit the investment.
In the cryptosphere, the wash sale rule does not exist . So if an investor still wishes to hold bitcoin and ether, he simply purchases the same amount of each immediately after selling the position. This does not create a wash sale, as it does in traditional financial securities.
The lack of a wash-sale rule in crypto is a very unique advantage to the savvy investor because crypto is incredibly volatile and its value may move significantly in 30 days. Being able to preserve a position while realizing the loss is a great way to boost long-term returns and increase tax efficiency of a financial plan.
Another thing worth taking note of is that losses realized in a crypto position can be used to offset tax liability on any gain realized, it does not have to be used against a crypto gain only.
It’s vital to note that taxation and crypto are a new frontier for many accountants and tax preparers. While the rules are clear, it’s incredibly important to track these transactions.
Drawing the curtain on this post, while we all wish crypto would simply rise in value forever, which unfortunately is not the case ; understanding the tax rules governing crypto positions can provide a unique opportunity during a bear market and can help ease taxable burdens of investors willing to do the work.
While it is not guaranteed that this rule won’t change in the future, as of now this is a unique feature of crypto and should be used in financial planning.
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