This Small Trick Can Help U.S. Investors Save A Fortune On Crypto Taxes

Crypto taxes in the United States can be a complex and overwhelming topic for many investors. With the increasing popularity of cryptocurrencies, it’s important to understand the tax implications and obligations associated with holding and trading digital assets. The Internal Revenue Service (IRS) considers cryptocurrencies as property for tax purposes, and as such, profits made from trading or selling cryptocurrencies are subject to capital gains tax. However, with the right knowledge and strategies, crypto investors can significantly reduce their tax burden and keep more of their hard-earned profits.

The Crypto Tax Loophole

With the entire crypto market going into months-long “crypto winter” back in 2022, certain investors could have used this dip to their advantage while filing their taxes by employing a strategy known as “tax-loss harvesting”. This strategy is especially helpful to investors and traders alike who have assets that decreased in value. Although it’s pretty late for now to take advantage of the opportunity, it most certainly can be utilized to prepare ahead for this year.

Tax-loss harvesting is a strategy that investors can use to reduce their tax bill by offsetting capital gains with capital losses. Essentially, it involves selling investments that have decreased in value, thereby realizing a capital loss that can be used to offset capital gains from the sale of other investments. This way, the investor reduces the overall taxable income and reduces their tax liability. Tax-loss harvesting is commonly used in the stock market, but it can also be applied to cryptocurrency investments. By carefully managing their portfolio and strategically selling losing positions, crypto investors can take advantage of tax-loss harvesting to minimize their tax bill and keep more of their profits.

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How This Benefits Crypto Investors

The Internal Revenue Service (IRS) considers virtual currencies to be property. When sold at loss, which means it cannot be recuperated to the amount it was bought for, the government organization will allow the investor to utilize those losses to offset capital gains, which are earnings gained from other investments. If an investor has annual capital losses that are greater than their annual capital profits, they may be able to deduct up to $3,000 of those losses from their regular income when filing their crypto taxes. It is to be noted that losses of the same type can only be used to offset gains of the same type. One can only offset long-term gains with other long-term losses, and the same for short-term, where gains can be offset only by short-term losses if the cryptocurrency is sold in less than a year.

Now, contrary to the case with U.S. stocks, the “wash sale rule” does not currently apply to cryptocurrency transactions. According to the IRS, this specific regulation details that an investor is not permitted to claim a tax deduction if he sells a security at a loss and replaces it within 30 days before or after the sale with the same security or a security that is “substantially identical.” This indicates that, in theory, a crypto investor could sell the cryptocurrency, declare a loss and then buy it again before the typical 30-day waiting period has passed. And in doing so, he/she will not be subjected to the wash sale rule.

However, industry experts say that the IRS could reject the tax benefit if an investor repeatedly sells the cryptocurrency at a loss and then again buys back the identical digital asset.

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