crypto strategy

Selling your crypto at a loss could lower your tax bill | Palm Beach Research Group

2022 has been a painful year…

Luckily, there’s one thing you can do today to ease some of that pain.

I understand if you are skeptical. After a bull run for the ages in 2021, stocks have entered a full-fledged bear market this year.

And the bond market saw a massive drop of 17% thanks to rising interest rates.

We also saw some of the biggest crypto drops since Crypto Winter 2017-2018…

Major cryptos like Bitcoin and Ethereum are down more than 75% from last year’s peak. Smaller crypto projects have been less successful.

And it was before the recent implosion of FTX and other crypto lending platforms.

Luckily, if you hold your crypto on an exchange, you can turn your losses into immediate tax savings…

In fact, just a few minutes could save you over $1,000 on your taxes this year.

This is because the IRS allows you to take $3,000 in losses against ordinary income in a year. And depending on state and local taxes, a $3,000 reduction in your income could easily add up to more than $1,000 in savings.

What’s the best way to do it?

Sell ​​your crypto holdings and post the loss.

But then – and here’s the twist – you can redeem your crypto right away.

The Crypto Loophole to the Rescue

Unlike stocks, IRS Code Section 1091, known as the “wash sale” rule, does not apply.

A wash sale occurs when an investor sells a security at a loss to claim a tax deduction…only to buy back the same (or nearly identical) security within 30 days of the sale.

The IRS prohibits such sales with stocks. If you sell a poorly performing stock now, you will have to wait 30 days to buy it back. Otherwise, you do not get the tax benefit of the loss.

But that is not the case with crypto…

Since the IRS still treats cryptos as “property”, they are not subject to a holding period for tax exchange sales.

So you could sell the crypto, post thousands of dollars in losses…and then redeem your holdings immediately.

The only exception is crypto that you hold privately – like in a personal wallet – as opposed to on an exchange…

But if you want to take advantage of current crypto losses in a taxable account, you should consider this option.

As Shehan Chandrasekera, Head of Tax Strategy at CoinTracker, states:

According Tax Notice 2014-21 and the FAQ published in 2019 by the IRS, cryptocurrencies are treated as property.

Since cryptocurrencies are not treated like stocks and securities by the IRS, they are not subject to the wash sale rules. This allows you to reap tax losses without meeting the 30-day rule that stocks are subject to.

Here’s an example of how a wash sale works…

Suppose you bought Ethereum (ETH) at $4,500 and it is now worth only $1,500.

Under this assumption, you can sell your ETH right now to reap $3,000 in capital losses per coin. And you could quickly buy it back at $1,500 to maintain your position.

Keep in mind that there are fees associated with transferring and exchanging crypto…so you’ll want to make sure these costs are less than what you’ll write off in taxes.

And if you don’t exhaust all your losses by the end of the year, you can carry them forward to future tax years.

So if you don’t have an offsetting gain, you can still suffer a loss of up to $3,000 for the current year.

Three steps to get you started

Remember that this information is for general tax purposes only. And… crypto is still somewhat of a “grey area” in terms of taxation.

We strongly encourage you to consult with a tax professional before conducting a crypto wash sale..

But if you want to consider this strategy, here are some steps to help you through the process:

  • Talk to your tax advisor: Tell them what you’re planning. Could you use some losses to offset gains on a one-to-one basis? Your CPA may not even know this avenue exists.

  • Consult a crypto tax consultancy: CoinTracker is an option. ZenLedger is another.

  • Know your situation: Before contacting you, know what cryptos you own, the quantity, the price you paid, your tax bracket, etc.

This tax tip allows you to benefit from the current Crypto Winter.

You will still be able to keep the same coins you started with, as you can buy them back immediately at a new – and much lower – price.

And you don’t have to wait until the end of the year to use tax-loss harvesting. This tax planning strategy can work at any time.

Remember, crypto volatility is the price of admission for life-changing crypto gains…but if you’re looking to recoup or limit your crypto losses, a wash sale might be right for you.

So consider selling some of your beaten cryptos before the end of the year… and buying them back at a lower price. (And be sure to consult your tax advisor before doing so.)

Don’t forget, if you followed Teeka’s advice to keep your crypto off an exchangeyou will not be able to apply this strategy without first moving it to an exchange

Good investment,

Andrew Packer
Analyst, Palm Beach every day

PS A wash sale could help lower your tax bill during this bear market… But if you want to protect your money against long-term inflation, you need to think outside the box.

This is why Teeka recently organized a Inflation Survival Summit detailing three of his favorite inflation-proof opportunities.

Click here to find out more…and you’ll even get details on its #1 inflation-proof investment with 25x growth potential over the next two years.

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