In the context of the 2018 crypto bear market, the WSJ suggests that “the only good thing about investing in cryptocurrencies [this year] was the tax break.”
Given that the United States tax authority, the Internal Revenue Service (IRS), has treated crypto as investment property as of 2014 — akin to stocks and bonds, not currency — crypto users can allegedly benefit from the “special and often favorable” taxation policy the country gives to investments.
For all investments in the U.S. — whether in stocks or in crypto — short-term gains and losses apply to holdings held a year or less, and any gains are taxable at a rate of as high as 40.8 percent. Long-term gains and losses meanwhile max out at an upper bound of 23.8 percent.
While losses can be used to offset taxes on gains for all investments, the potential tax relief may be even greater than for traditional assets in the case of crypto, because a “a quirk” in U.S. tax rules permits traders to sell and reinvest their crypto right away, in full respect of the law.
This is because cryptocurrencies are exempt from so-called “wash sale” rules, which “prohibit capital-loss deductions when investors purchase a security such as a stock within 30 days of selling a loser.”
Jim Calvin, a CPA and crypto specialist at Deloitte Tax, told the WSJ that as little as “an hour,” and certainly a day, after booking a loss is enough to wait so that traders remain the right side of the law if they choose to repurchase their crypto.
More broadly, the WSJ notes, timing is crucial, as tax losses can be carried forward but not back — so if you sold at a gain during the crypto bull run of winter 2017, your losses this tax year (post-April) can’t offset the tax owed on earlier profits.
Robert Gordon, a tax strategist from Twenty-First Securities, advised the WSJ that whether or not they intend to repurchase crypto, traders can benefit from either harvesting all their losses, or even just up to the amount of the sum total of their taxable gains, from crypto or otherwise.
As previously reported, data released ahead of the close of the preceding tax year indicated that just 0.04 percent of tax filers were reporting capital gains from crypto investments to the IRS.
Back in July 2017, the IRS had required that major U.S. crypto Coinbase hand over detailed information on every one of its then over 500,000 users in an attempt to prevent tax evasion. However, a court order in November 2017 reduced this number to around 14,000 “high-transacting” users, which the platform later reported as 13,000.