Make the Most of a Crypto Downturn
I hate to say it, but the crypto markets are in bear territory. There’s no way to sugarcoat the fact that crypto markets are having a difficult year with Bitcoin (BTC) currently trading at $29,592.55.
The term “bear market” is defined as a market that has lost more than 20% in a given year. BTC is down -35% in 2022, Ether (ETH) is down -43% in 2022 and many other coins are down by more. We have seen the collapse of Luna and may rug pulls across the space. However bad it may be, there is a silver lining unique to crypto that tax-savvy investors can use to their advantage.
I have been trading stocks for years so the concept of wash sales and tax loss harvesting are pretty familiar, but for those in the crypto space they might not be well known. Even better in the crypto space there is a wash-sale loophole and you have the ability for tax loss harvesting.
So how can you take advantage of these in a bear market? Let’s assume you purchased $10,000 of BTC at $50,000 per coin and $10,000 of ETH at $3,000 per coin. Assuming you split the funds evenly between BTC and ETH at the time of purchase you own 0.20 BTC and 3.33 ETH. The investor held the coins through the bear market and still currently owns 00.20 BTC and 3.33 ETH. However, the current value of the position if BTC is trading at $30,000 and ETH is trading at $2,000, is $12,666 with unrealized loss of $7,334. To realize this loss, you can sell the crypto positions and the loss is realized. The -$7,334 loss can now be used to offset any taxable gains in your portfolio. This is tax-loss harvesting in it's purest form.
If you did this in the stock market you have to wait 30 days from the date of selling an asset in order to repurchase the same asset. If you do not wait 30 days, the transaction is considered a “wash sale” and the loss is not able to be used to offset a gain. If you are savvy you can sell for a loss to offset and but back those assets to wait for them to rebound and get a nice break during tax time!
Trade smarter my friends we live in troubled times.
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