Do you invest in digital money such as Bitcoin or Ethereum? If so, then you need to pay attention to the ways that your choices might impacts your taxes. As we come to the end of the year, there are certain tricks and tips that you need to know about. For example, are you familiar with the wash sale rule for cryptocurrency? It’s poised to change soon but right now you’re at an advantage.
What Is The Wash Sale Rule?
A wash sale refers to the act of selling your investment at a loss then buying it back a little bit later. There are several different reasons that you might do this. However, the most common is for tax purposes.
In particular, you might sell investments at a loss at the very end of the year. This allows you to take the loss on your taxes benefitting you financially. Then, at the start of the new year, you purchase back those exact same investments.
In order to minimize people gaming the system in such a way, the IRS instituted a wash sale rule. This rule essentially says that if you take a loss on an investment, then you can’t repurchase the investment within 3o days. If you do repurchase the same (or substantially similar) investment within the 30 day period, you can’t take the loss on your taxes.
Wash Sale Rule and Cryptocurrency
As of right now, there is no wash sale rule for cryptocurrency. This means that you can go ahead and sell your cryptocurrency at a loss right now. Then you can purchase it back, immediately if you want. In terms of your taxes, of course, you’d want to repurchase at the beginning of the new year. This is what allows you to take the loss on your taxes for this current year.
If you saw a gain on your cryptocurrency investment this year, then selling it right now at a loss could benefit you financially as a whole. Your loss offsets the gain. Therefore you pay fewer (or no) taxes on your investment. Then, at the beginning of the year, you can repurchase that investment. This allows you to stay in the cryptocurrency game in the way that you want to while costing you less in tax payments this year.
Wash Sale Rule for Cryptocurrency May Change Soon
If you’re a savvy investor then you’ll take advantage of the lac of a wash rule sale for cryptocurrency this year. However, be aware that this is all likely to change soon. Right now, you’re welcome to take those losses even if you buy back the exact same cryptocurrency. However, in the near future, it seems that the IRS will indeed institute a wash rule for cryptocurrency. This will disallow those sell-then-buy opportunities for the future as far as tax benefits go.
The change to the rule begins in 2022 as part of the Build Back Better Act. This act didn’t implement sweeping income tax changes. However, it alters a variety of tax rules that might affect you. The cryptocurrency wash rule is one of those.
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