June 2022 saw a significant decline in the crypto market; however that doesn’t mean it’s time for investors to panic. In fact, crypto tax advisors would actually tell you that now could be an opportune moment to lean on alternative strategies to win in a market that is down.
One such lever that investors have turned to is wash sales, which have proven to be very popular, but what exactly are they and how can I use them as part of my investing strategy?
What are Wash Sales?
A wash sale is when an investment is sold to be repurchased as a similar asset, most likely at a similar price. For example, you could sell your Bitcoin today, knowing that the market is down, with a view of purchasing it back at the same price tomorrow. You might be thinking, ‘why would I do this?’ The simple answer here is so that you are able to claim losses for tax purposes, and those losses can then be used to minimise taxable capital gains.
Let’s look at another example:
Steven bought 1 Bitcoin in August 2021 for $45,000. Steven then saw the price of Bitcoin drop to $44,000 and sold it. A capital loss of $1,000 is made. The $44,000 is then used to purchase Bitcoin, and Steven holds it.
Elsewhere, Steven has also invested in Ethereum in the same financial year. Steven bought 1 Ethereum for $3,000 and later sells it when Ethereum is worth $4,000. This makes a capital gain of $1,000 for Steven.
So what did Steven do? Steven used his capital loss from Bitcoin to offset his capital gain from Ethereum, which means that no Capital Gains Tax would need to be paid from his gain.
The Wash Sale Rule
The wash sale rule is an Internal Revenue Service (IRS) regulation to prohibit investors from creating tax deductions from wash sale activities.
If someone sold an investment and then repurchased an identical one within a 61-day window (30 days before or after the sale), the IRS won’t allow the individual to claim that loss on their taxes in the same (or recent) financial year. For most investments, this undermines the power of using tax-loss harvesting strategies.
So, what does this mean for crypto investors? The most recent advance of this rule came in June 2022 and did not cover the investment of cryptocurrency as the rule is only applied to stocks and securities. In essence, crypto is not a stock and therefore does not fall within the jurisdiction of the wash sale rule.
Even though there are ways to avoid violating the wash sale rule for stocks and securities, namely the sale and purchase of the asset coming outside of the 61-day window, the rule not applying to crypto means that tax-loss harvesting strategies are clearly the most effective.
How Can I Use All Of This To Maximise My Investment Strategy?
Wash sales are a vital consideration when looking at your crypto investment strategy and how you manage your assets. It’s imperative that you get the right advice on identifying your own opportunities, viewing any unrealised losses and scoping out your short-term and long-term capital gains.
This information will help you make the right decisions with tax-loss harvesting using crypto, especially during market falls. Get in touch with us today and we’ll connect you with a specialist crypto tax advisor to help with more tax-efficient strategies in your crypto trading.