As we near the end of another good year for domestic equities, many investors find themselves facing substantial capital gains taxes. Generally, if you wish to minimize capital gains tax, you should sell securities with a loss to offset those gains – doing this strategically is called tax-loss harvesting. A potential downside to this strategy is that losses are disallowed if the investor purchases back the same security within 30-days of the initial sale, effectively eliminating the ability to recognize the losses on their taxes. This rule, called the wash-sale rule, forces an investor to get out and stay out if they want their loss to count. Cryptocurrency, however, is an exception to the rule for this year and this year only.
Bitcoin hit its all-time high in November of this year at just over $68,000. However, after weeks of decline, Bitcoin’s price stands just below $47,000. While this is still well above Bitcoin’s January price of $30,000, the volatility has left some people seeing red in their crypto portfolios. The following insights will help answer what we can do before year-end.
The IRS defines cryptocurrency as a capital asset subject to capital gains rates, like a stock. In 2021 you can sell cryptocurrency at a loss and immediately re-enter the position without disqualifying the loss. This loophole is the only one of its kind for investors who want to recognize losses without the penalty of staying out of their positions for 30-days. Investors should consider this a viable planning strategy before the IRS implements wash-sale rules on all cryptocurrencies in 2022.
Those with losses that exceed their realized capital gains can also take advantage of the unlimited tax loss carryforward. Any loss that exceeds capital gains in a given year can be used to offset $3,000 worth of income until the total loss is exhausted. Simply put, you can harvest an unlimited amount of losses and carry them forward to an unlimited number of tax years. Although this is true for other capital assets, digital currency is our only way to avoid the wash-sale rule in 2021.
The tax landscape is constantly changing and evolving, especially with digital assets such as cryptocurrency. We are not CPAs, tax accountants or attorneys and do not give legal or tax advice. We are fortunate to work with excellent tax and legal professionals and are happy to provide a recommendation if needed. We encourage all our clients to reach out to us with your questions and concerns. We are happy to be your first call to help you determine if you need to seek out additional expertise.