The wash sale rule is a tax law that prohibits investors from selling securities at a loss and then immediately buying them back. The rule is designed to prevent investors from taking advantage of short-term losses to reduce their taxable income.
However, the wash sale rule can also be used to your advantage with cryptocurrency as it does not apply. If you sell crypto at a loss and then buy them back within 30 days, even immediately, you can use the losses to offset any gains you may have realized during the year. This can help you save on taxes. This is because the IRS currently views crypto as property, not a security, meaning that it does not apply to existing wash sale legislation.
How does the wash sale rule work for cryptocurrency?
If you sell cryptocurrency at a loss and then buy it back within 30 days, even immediately, you can use the losses to offset any gains you may have realized during the year. This can help you save on taxes.
For example, let’s say you bought 1 ETH for $1,000 on January 1st. Then, on March 1st, you sold that ETH for $800. You would have a $200 capital loss.
Now, let’s say that on March 2nd, you bought 1 ETH for $850. Even though you bought the ETH back within 30 days of selling it, you can still use the $200 loss to offset any other gains you realized during the year.
This is a valuable tax strategy that can save you money. So, if you’re thinking about selling cryptocurrency, it’s worth considering the wash sale rule and how you can use it to your advantage.
Will the Wash Sale Rule be outlawed in the US?
The wash sale rule has been in effect since the 1930s and is not specific to cryptocurrency. It’s a general rule that applies to all securities, including stocks, bonds, and mutual funds.
There have been calls to expand the wash sale rule to crypto, but so far those efforts have not been successful. Most recently in the Infrastructure bill and the Inflation Reduction Act.
So, for now, the wash sale rule is still in effect and can be used to your advantage when investing in cryptocurrency.
What are some other strategies for saving on taxes with cryptocurrency?
In addition to the wash sale rule, there are a few other strategies you can use to save on taxes when investing in cryptocurrency.
1. Use a tax-advantaged account: If you have a 401(k) or IRA, you can invest in cryptocurrency through a self-directed retirement account. This will allow you to grow your investment without paying taxes on the gains.
2. Use capital losses to offset gains: If you have any capital losses from other investments, you can use them to offset gains from cryptocurrency. This can help reduce your overall tax bill.
3. Hold for the long term: If you hold cryptocurrency for more than one year, you’ll be taxed at the long-term capital gains rate, which is lower than the ordinary income tax rate.
4. Use a tax professional: Cryptocurrency can be complex, so it’s important to work with a tax professional who can help you maximize your deductions and minimize your tax liability. Luckily for Ledgible users, the platform flows right into Tax professionals existing systems, making crypto taxes easy for all parties involved.
The wash sale rule is just one way to save on taxes when investing in cryptocurrency. By using this strategy, you can keep more of your earnings and grow your investment over time.