So everyone knows the market retracted a good bit, this comes as a shock to some and not at all to others. Guess what, this is the perfect time buy more! If you've bought higher than the current price, now's a great time to sell and buy back in. At least here in the US crypto isn't subject to wash-sale rules, yet, and you're able to claim the "short term loss" you experience by selling after the price drops on your income taxes for the 2021 tax year. You can then immediately re-buy in at the new "lower rates" to effectively lower your cost basis. By lowering your cost basis, you're increasing your profit margins when your asset/crypto goes up in value. I'm normally hold for a year to minimize my tax liabilities type of person, but this is a "loophole" that even I exploit. If you don't know what a "wash-sale" is, have no fear. Here's a definition from Investopedia:
The wash-sale rule is an Internal Revenue Service (IRS) regulation that prevents a taxpayer from taking a tax deduction for a security sold in a wash sale. The rule defines a wash sale as one that occurs when an individual sells or trades a security at a loss and, within 30 days before or after this sale, buys a "substantially identical" stock or security, or acquires a contract or option to do so. A wash sale also results if an individual sells a security, and the individual's spouse or a company controlled by the individual buys a substantially equivalent security.
Why does this matter, and how does it relate to my taxes?
Anytime you sell an asset you'll have a gain or a loss. You'll owe taxes on that gain or loss. Short term capital gains are factored at your federal income tax bracket. See below.
2021 Federal Income Tax Brackets
Like it or hate it, these are the US federal tax brackets for 2021. So depending on your annual income and filing status you'll owe that percentage of your profits. The way taxes are done is a bit counter intuitive, but I'll save that for a later blog post. In a nutshell: Understand that you pay taxes at the 10% bracket first, then anything above it is taxed at the 12% bracket, and if you cross into the 22% bracket you will owe taxes on portion at 22%. It's not a flat, "Your entire income is taxed at your respective income level" it's tiered.
Long term gains however are taxed at a different rate. You'll quickly see why holding an asset for a year before disposing of it is advantageous. See Below:
2021 Long Term Gains Taxes
If you bounce back and forth you'll notice that depending on your filing status and your income level you may pay 0% in taxes. That's huge! That means you keep everything you "earned" in profits when you sell an asset rather than giving the government 10-12% of your profits. I can only speak for myself, but frankly I think that most of the government/politicians suck at their jobs and misappropriates taxpayer dollars on the regular - regardless of which political party is in the majority. So I'd rather not give them any more than I absolutely have to. If they were more fiscally responsible I'd have a lot less of a problem with it, but they're not and they're screwing everyone now and future generations in my opinion. I'll save my rant on budgetary buffoonery in government programs/offices/departments/agencies that I have personally witnessed in my over a decade of government service for a later rant.
Why is this important?
So you may be saying, "I don't get it..." That's ok, here's the gist. If you bought high, and sell low, you have now incurred a "loss." You can claim $3K in losses a year, and carry the remainder forward to apply to future tax years. Because of the lack of a wash sale rule, you can sell your crypto that you purchased high, and buy back in at the current lower market rate immediately and not worry about not being able to claim the loss on your taxes. In a bull market, the value of that asset will continue to climb up to, and hopefully beyond what you sold it at. Since you bought in lower you've effectively lowered your cost basis and increased your net profits when you do end up selling AND you get the claim the "loss" you incurred to further depress your income level for tax filing purposes.
As always you do you, and none of this is financial or tax filling advice. Consult with a professional if you need/want/desire those services.
Follow along to my other money and investing related posts - HERE. You can check out the series I'm writing on learning how to manage your money and grow your wealth. Perhaps it will be of use to you, or someone you know.