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Bitcoin's slump opens the door to a tax loophole every investor needs to know

Bitcoin's slump opens the door to a tax loophole every investor needs to know
Bitcoin's slump opens the door to a tax loophole every investor needs to know

A months-long bull run has finally driven crypto prices over a cliff.

Bitcoin, Ethereum and Dogecoin prices are on their way back up after all three cryptocurrencies saw their values plummet in May, but investors will be waiting some time before they recover the $590 billion in value the global crypto market shed between May 12 and May 17.

If you’re a crypto investor down in the dumps, there’s a strategy you can use that might take some of the sting out of your recent losses. It’s called a “wash sale,” and it could help mitigate your losses by creating some pretty tasty tax savings — it could even be a reason to increase your stake in crypto now that prices are down.

How a 'wash sale' can save you money

Cryptocurrencies aren’t regulated as securities. In fact, the IRS actually taxes them as property. That means the rules that apply to typical stocks don’t apply to crypto, and the rules around "wash sales" don’t apply.

A wash sale takes place when you sell your stocks for a loss and then, within 30 days, you acquire more of the same securities, either through an outright purchase, a taxable trade or an option to buy.

If you scoop up more of the same stocks in that 30-day period, the IRS will prohibit you from using the losses incurred on the sale to reduce the capital gains taxes generated by your more successful investments.

But with crypto, there’s a lot more fun to be had. Your losses can be used to draw down — or completely wipe out — your capital gains taxes. You can also buy more of the same crypto asset and try to capitalize on a swift rebound without having to wait 30 days, which, in crypto time, is forever.

Let’s say your Bitcoin investment lost you $50,000 a few weeks back, but the gains from your stocks and mutual funds this year earn you $50,000. Your Bitcoin losses would offset the taxes you would otherwise have to pay on your capital gains.

If you’re going to try and use the wash sale rules to your advantage, just make sure you’re not repurchasing too soon after making the sale. The IRS can still prevent you from claiming the tax credit if they think the sale lacks legitimacy. And don’t plan on trying this with Coinbase shares. They play by the same rules as every other stock.

Whenever you try out a new tax strategy, make sure you’re making an informed decision. Reach out to a reputable financial adviser so you can understand the short- and long-term benefits — and risks — of what you’re about to do.

What’s up with crypto prices?

Income tax collection growth,
William Potter / Shutterstock

In May, Bitcoin, Ethereum and Dogecoin investors went on a selling spree that many feel was sparked by comments made by Tesla CEO Elon Musk.

Bitcoin prices began an intense run-up after the electric car innovator announced in February that it would be purchasing $1.5 billion in cryptocurrency and allowing customers to pay for their Teslas with bitcoin.

On Feb. 8, the day of Tesla’s announcement, Bitcoin closed at just over $46,375. By April 15, it had hit a new peak of $62,237.

Ethereum and Dogecoin prices followed a similar, though slower, path. Ethereum peaked at $4,179 on May 11, while Dogecoin hit a high of $0.68 on May 7.

But the air started rushing out of the crypto market on May 12, when Musk announced that Tesla would no longer be accepting Bitcoin as payment for vehicle purchases because of the environmental cost of Bitcoin mining. Over $300 billion in value evaporated from the crypto market in just one day.

Not even a week after the self-styled Master of Coin backtracked on his commitment to Bitcoin, China banned its financial institutions from offering any services that involve cryptocurrency. The double dose of bad news for crypto kicked off weeks of losses.

As of June 7, Bitcoin was selling for about $35,000, rough 44% down from its peak.

Buy low

The stock market screen and graph of selling and buying
Enjoy The Life / Shutterstock

Cryptocurrency is mystifying to most people, but there are two things we know about it for sure:

  1. It has already rebounded from multiple crashes.

  2. It has made a lot of people rich.

So if you’re interested in buying crypto on the dip, who can blame you, especially if assets like Bitcoin can help you keep the taxman at bay?

Investing in cryptocurrencies doesn’t require you to be a tech wizard or obsessive investing geek with a degree in engineering. You can do it, easily and safely, through a legit, wildly popular investing app.

And if you’d rather stick to more traditional investments, it’s not like the stock market has shown much sign of cooling. You can actually start building a diversified portfolio with little more than the “spare change” left over from your everyday purchases.