🔑 Tax loopholes - Wash Sale Trading 🔑
crypto tax loophole

🔑 Tax loopholes - Wash Sale Trading 🔑

By _-_ | Tails From The Crypt | 15 Oct 2020


Tax loopholes are ways to legally owe less money or decrease your tax burden, generally because of technical definitions... Today we'll examine one that applies to Cryptocurrency and Bitcoin, "Wash Sales"

There are many changes happening the crypto space. Especially as it comes to governmental over site. With the huge increase of Bitcoin value, and more well established financial entities moving their funds into Crypto, the IRS is on the lookout for ways to not be left behind and increase their revenue.

the SEC has doubled-down on ICO's (initial coin offerings) as a securities trade, which gives greater control and limits to what can be done. But regular crypto transactions such a buying/selling/holding are not considered to be income ... but rather as a property.

This makes them distinct from stocks/bonds/securities. Rule 1091 of the IRS code defines when a wash sale occurs. Take for example you buy 10x shares of Amazon stock at $100 per share,   then later sell all 10x when the price drops to $50 per share ... if you repurchase the same (or similar) stock within 30-days, you would not be able to count the 'loss' of $500 ... this was to prevent traders for artificially generating losses to be able to pay less taxes ..

the trick here is that Crypto is not considered a "stock or security" it is expressly defined as a property in Notice 2014-21



For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.

 

This means that it isn't covered by the "wash-sale" rule of 1091, which means you could potentially utilize this loop hole to lower your final tax burden ..

wash sale

 

for example :

If you purchased 1x Bitcoin at $12,000 ... but then the price dropped to $10,000.  You could sell your Bitcoin (-$2,000 loss) and instantly (within 30-days) repurchase the 1x bitcoin at the new $10,000 price .... You're still holding 1x BTC of value for your portfolio, but you now also have a -$2,000 loss that you can apply to your capital gains and loss tax forms. Since the Crypto is legally defines as property, it is not subject to the wash-sale rules that apply to security/stocks exclusively.

Now this won't make sense unless you already have some other income that would cause you to owe money. Say you sold a bunch of ETH, and you need a loss to help counter-act what you would owe ... Or you have income from other stocks/securities that you wish to lower. You'll have to speak with an accountant to discover exactly how (and how much) this loophole could save you on your tax payment

Also be aware that tax law is ever changing, and especially with cryptocurrency this could change at any time. If the IRS redefines crypto as a security instead of property ... or if they expand rule 1091 to explicitly include crypto (but not all property) this tax loophole will close. But until that happens, this

 

 


this post does not constitute legal or tax advice, consult with your registered CPA for the most updated tax rules that apply to your financial situation.


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Tails From The Crypt
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