Make The Most of Your Failed Bitcoin Gamble: Sell Now
The popping of the crypto bubble has been painful, but a quick sale (and repurchase, if you choose) may lower your taxes
Almost the only good thing about investing in cryptocurrencies in 2018 was the tax break.
These assets have been crushed this year. Bitcoin’s price, for example, has fallen from about $15,000 to about $4,000.
The U.S. tax code provides a measure of relief by allowing investors to use such losses to offset taxes on winners, either now or in the future.
Digital currencies have a wrinkle that makes them even better in this situation. If you’re still a bitcoin believer, you can use a quirk in the rules to sell and reinvest right away without running afoul of the Internal Revenue Service. By contrast, many stock and fund investors have to wait 30 days to repurchase losers.
“A lot of crypto investors seem clueless about taxes,” says Darren Neuschwander, a certified public accountant with GNM Trader Tax who says he has prepared several hundred returns for crypto investors. Nearly 40% of them are amended returns to clear up past missteps, he adds.
Now is a good time to learn more if you invest in cryptocurrencies, as the IRS is cracking down on abuses. It is pursuing criminal cases involving crypto, and earlier this month an official said the agency has seized its first crypto wallet in a civil case.
The IRS has also sent information on 11,000 digital currency accounts to revenue officers across the country to look for matches with tax collection cases. The accounts were held at Coinbase Inc., a prominent cryptocurrency exchange. Following a federal court order, it turned over information on about 13,000 Coinbase accounts worth more than $20,000 apiece between 2013 and 2015.
Driving much of the tax treatment of crypto is a 2014 IRS notice. It held that cryptocurrencies are often investment property, such as stocks and bonds, and not currency. The U.S. tax code has special and often favorable treatment for investments.
Under these rules, no tax is due when an investor buys or holds a cryptocurrency. After a sale, the investor determines whether there’s a profit or loss by subtracting the purchase price plus adjustments from the selling price. So it’s important to keep good records of transaction dates and prices of different lots.
Short-term gains and losses are from investments held a year or less, and these gains are taxed at rates up to 40.8%. Long-term gains and losses are from investments held longer than a year; they have favorable rates that top out at 23.8%.
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As an investment, crypto has other key benefits. Losses can offset taxable gains—even on other investments such as stocks or land. Up to $3,000 of losses can also offset income such as wages, and unused losses carry forward for future use.
Here’s an example.
Say that earlier this year, Martha sold bitcoin and reaped a gain of $10,000. She also sold Apple shares held in a taxable account, for a gain of $20,000. More recently, she sold bitcoin and had a $40,000 loss.
As a result, Martha doesn’t owe tax on the $30,000 of combined gains in bitcoin and Apple because her $40,000 capital loss on bitcoin offsets them. She can use the remaining $10,000 to offset $3,000 of her wages and then carry $7,000 forward for future use.
Robert Gordon, a tax strategist who heads Twenty-First Securities, says investors should take all their losses if they’ve soured on crypto and just want out.
Others may want to take crypto losses up to the amount of their taxable capital gains, either from crypto or other assets. This could mean selling a winning asset before yearend, but it’s legal to buy it back right away.
Crypto believers who don’t have taxable gains may still want to harvest losses and repurchase the coin. This move can shelter up to $3,000 of ordinary income such as wages and provide losses for use against future capital gains. In this case, Mr. Gordon suggests taking short-term losses first.
“They’re more likely to be useful than long-term losses because of how long- and short-term gains and losses offset each other,” he says.
The good news here is that cryptocurrencies aren’t subject to the “wash sale” rules. They restrict capital-loss deductions when investors purchase a security such as a stock within 30 days of selling a loser.
This means an investor can sell a cryptocurrency, book a loss, and repurchase it soon after.
Jim Calvin, a CPA and crypto specialist with Deloitte Tax, says that an hour after booking a loss ought to be enough time to wait, and a day certainly would be, because cryptocurrencies are so volatile.
Timing could present challenges for some crypto investors. Those who sold at a gain in 2017 owed tax for last year, and this year’s losses can’t carry back to lower last year’s taxes. But if an investor took bitcoin gains early this year and also has losses, matching them could lower taxes for 2018.