This Little Trick Can Help US Investors Save A Fortune On Crypto Taxes

With the set crypto market spend months “crypto winter” in 2022, some investors could have used this decline to their advantage when filing their taxes by employing a strategy known as “tax loss harvesting.” This strategy is especially useful for investors and traders who have assets that have fallen in value. Although it is quite late to take advantage of this opportunity, it can certainly be used to prepare in advance for this year.

Tax loss harvesting is a strategy investors can use to reduce their tax bill by offsetting capital gains with capital losses. Essentially, it involves selling investments that have fallen in value, realizing a capital loss that can be used to offset capital gains from selling other investments. In this way, the investor reduces the overall taxable income and reduces his liability to tax. Tax loss harvesting is commonly used in the stock market, but it can also be applied to cryptocurrency investments. By carefully managing their portfolio and strategically selling losing positions, crypto investors can take advantage of tax loss reaping to minimize their tax bill and retain more of their profits.

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How It Benefits Crypto Investors

The Internal Revenue Service (IRS) considers virtual currencies to be property. When sold at a loss, meaning it cannot be recovered at the amount it was purchased for, the government agency will allow the investor to use those losses to offset capital gains, which are income from other investments. If an investor has annual capital losses greater than their annual capital profits, they may be able to deduct up to $3,000 of those losses from their regular income when filing their claim. crypto taxes. It should be noted that losses of the same nature can only be used to offset gains of the same nature. Long-term gains can only be offset by other long-term losses, and the same goes for the short-term, where gains can only be offset by short-term losses if the cryptocurrency is sold in less than a year.

Now, unlike the case with US stocks, the “wash sell rule” does not currently apply to cryptocurrency transactions. According to the IRS, this specific rule clarifies that an investor is not allowed to claim a tax deduction if he sells a security at a loss and replaces it within 30 days before or after the sale with the same security or a security which is “substantially identical.” This indicates that, in theory, a crypto investor could sell the cryptocurrency, declare a loss, and then redeem it before the end of the typical 30-day waiting period. And in doing so, he will not be subject to the fictitious sale rule.

However, industry experts say the IRS could disallow the tax benefit if an investor repeatedly sells the cryptocurrency at a loss and then buys back the identical digital asset again.

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