The One Crypto Tax Strategy to Know!

Because cryptocurrencies are classified as “property” rather than as securities, the wash-sale rule does not apply if you sell a cryptocurrency holding for a loss and acquire the same cryptocurrency before or after the loss sale.

You just have a garden-variety short-term or long-term capital loss depending on your holding period. No wash-sale rule worries.

This favorable federal income tax treatment is consistent with the long-standing treatment of foreign currency losses.

That’s a good thing, because folks who actively trade cryptocurrencies know that prices are volatile. And this volatility gives you two opportunities:

1. profits on the upswings
2. loss harvesting on the downswings

Let’s take a look at the harvesting of losses:

• On day 1, Lucky pays $50,000 for a cryptocurrency.
• On day 50, Lucky sells the cryptocurrency for $35,000. He captures and deducts the $15,000 loss ($50,000 — $35,000) on his tax return.
• On day 52, Lucky buys the same cryptocurrency for $35,000. His tax basis is $35,000.
• On day 100, Lucky sells the cryptocurrency for $15,000. He captures and deducts the $20,000 loss ($35,000 — $15,000) on his tax return.
• On day 103, Lucky buys the same cryptocurrency for $15,000.
• On day 365, the cryptocurrency is trading at $55,000. Lucky is happy.