Selling vs. “Selling”
For traditional investments there is something called the “Wash Sale Rule”. It states that if you sell a stock at a loss but then buy an identical (or “substantially similar”) stock within 30 days, you are not able to deduct the loss.
Essentially, the IRS does not want people “selling” their investments in order to harvest the losses for tax purposes but then immediately go and repurchase those same investments. If an item is sold and immediately bought again, then the taxpayer is not really and truly disposing of the asset. Perhaps on paper it shows as a sale, but in substance of course it isn’t.
Because of this, those “losses” are not deductible on your tax return. That makes sense and is fairly well-established tax law.
Crypto Bypasses the Wash Sale Rule – For Now
But CURRENTLY, losses on crypto transactions are not subject to wash sale rules. This is VERY likely to change in the near future. Congress is already proposing legislation to close this loophole, but it is unlikely anything will be passed until 2022.
That loophole creates the possibility of those significant tax savings if you have high realized capital gains, but also have unrealized losses. Under the current rules, you could sell those losing positions, immediately rebuy them, and still use those “losses” to offset against your gains.
In certain situations, this could result in massive savings.
Of course, this is somewhat contingent on scale. It is also dependent on the token itself, the network the token is built on, and where the token is held:
- Some altcoins have very high taxes as part of their tokenomics
- A token on Binance Smart Chain is going to have much lower gas fees than one on Ethereum
- An exchange like KuCoin is naturally going to have lower fees than a larger platform like Coinbase
The losses on those unrealized transactions – and the associated tax savings from them – will need to be substantial to offset against those fees and the fact that executing these trades also resets your holding period for capital gains purposes.
But it is a potential tool available to you and one you should at least consider when doing tax planning with your CPA.
Any accounting, business, or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.
