Latest bitcoin swings allow investors to exploit a large US 'tax loophole'

The steep and continued falls of bitcoin and other of its peers in recent weeks have hurt many crypto investors. However, they have also opened a window: take advantage of the losses to save taxes by virtue of a ‘tax loophole’ existing in the US.

Both bitcoin and ether have lost more than half their value in volatile trading in the last month. A bitcoin investor who bought at the all-time high in mid-April (touched $ 64,000) and sold at the worst of last week (near $ 30,000) would have lost 54%, for example. Oddly enough, this has a positive side for the investor.

Where is the trick? Losses in cryptocurrencies do not have the same tax treatment in the US as those related to stocks and shares in funds investment. This is because what is known as wash-sale rule (something like a wash sale rule) does not apply to cryptocurrencies.

What does this wash-sale rule? It is a rule of the US Internal Revenue Service (IRS) that prevents a taxpayer from obtaining a tax deduction for a security sold through a ‘laundering sale’, understood as one that occurs when a person sells or negotiates a security with a loss and, within 30 days before or after this sale, you buy a “substantially identical” stock or security, or acquire a contract or option to do so.

The fact that the standard applies to stocks but not to cryptocurrencies offers investors in tokens two advantages– They can sell their cryptocurrencies at a loss and then use that loss to reduce or eliminate capital gains tax on their investments that give a positive return. They can then quickly buy back the cryptocurrency they sold so they don’t miss out on a subsequent bounce.

“It is a legal loophole, so to speak,” he explains to CNBC Ivory Johnson, Certified Financial Planner and Founder of Delancey Wealth Management. This ‘loophole’ exists because regulators do not consider cryptocurrencies as “securities”. Instead, the IRS does tax them as property, Johnson adds. “This allows you to completely manipulate the cryptocurrency to the downside and use it to create a tax benefit,” says Leon LaBrecque, an accountant at Sequoia Financial. Experts recall that this ‘benefit’ would not serve for securities related to cryptocurrencies -see Coinbase shares-, only for them.

This divergence of tax treatment becomes decisive when talking about an asset as volatile as cryptocurrencies, especially in recent weeks. Taking as case an investor who bought bitcoin at highs and has now sold near lows incurring a loss of $ 35,000, this person could this year sell shares with a profit of $ 35,000 and with the losses of the cryptocurrency ‘erase’ the losses. relevant capital gains taxes.

Also, this same investor could have quickly bought bitcoin back near the low it sold at and not miss any upcoming rallies. The declines these days have been followed by considerable increases. If you compare yourself to an investor who would have had the same thing but stocks, you would miss up to 30 days of potential earnings before going back into those stocks.

Not everything is so ‘easy’, However. Cryptocurrency sales must still have “economic substance” or investors risk being labeled by the IRS as “fake” transactions, he also explains to CNBC Jeffrey Levine, head of planning at Buckingham Wealth Partners. Basically, what the IRS wants is that the investor assumes some economic risk for the sale, that is, some risk of loss, says Levine. Investors who sell bitcoin at a loss and buy back the second risk that the Treasury will cancel the tax benefit.

The cited advisers see it feasible for regulators to toughen these rules in the future. However, it seems unlikely that the transactions that were made before any modification will be canceled.

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