We all know the dreaded “Wash Rule”, which inhibits us from selling securities at the end of the year just to buy back on January 1. The goal is to offset capital gains with capital loss while still maintaining ownership of the asset, but the IRS doesn’t allow you to buy the same or “similar” security for 30 days.

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Crypto is still classified as “property” which means the Wash Rule does not apply! You can bank your capital losses for the future without waiting to buy back. Although this can change in the future, here are some tips for how you can take advantage before the end of 2022:

Determine Your Cost Basis

The easiest cost basis is your average purchase price. Services like Taxbit and Koinly allow you to connect your Coinbase or other exchange accounts to consolidate your transactions, where you can get your average purchase price.

You can also decide to sell specific purchases of Bitcoin, for example, that you made at the market top. For those who bought Bitcoin years ago, their overall cost basis may be profitable, but specific purchases in 2022 are down. Since there is no way to sell those purchases specifically, you just need to have good records of those transactions and sell the same quantity of tokens you bought.

Factor in Trading Fees

It is important to factor in trading fees on exchanges (~0.1% or less if you trade high volume) which can eat into the savings you would realize from offsetting capital gains.

“Resetting the Clock”

By selling a portion of your crypto for tax loss harvesting, those tokens become short-term assets for a year. This becomes a consideration if you intend to sell that portion of your crypto for a gain in 2023l. If you’re investing for the long term, it doesn’t matter, but those looking to sell in 2023 will not want to be taxed at a higher short-term capital gain tax rate.

This can be confusing for Bitcoin’s fractional shares, but let’s say you have 1 BTC and intend to sell and buy back 0.25 BTC for tax loss harvesting. Only that 0.25 will be taxed under the short-term capital gain rate if you sell in 2023.

Keep Records of All Transactions

Whether you use sites like Taxbit and Koinly or track everything in Excel, it is important to keep records of all transactions or decisions made in the event of an audit. These sites don’t know what cost basis you used on your tax return, so it is important to write down how you arrived at your calculated losses.

Capital Losses Can Be Used in Perpetuity!

With crypto it is so easy to accumulate additional capital losses while still being able to buy back the same assets instantly. If you have solid records of your purchases, it is a good idea to bank those losses to offset future gains in a year that might not have as many underperforming assets.

P.S. Sometimes it is just best to sell your assets and move into higher quality assets and that is where the capital inflows will go when markets emerge from the bear first

Joe Robert is currently the Chief Executive Officer of Robert Ventures, with over 20 years of asset management experience. Since he started Joe has created predictable double-digit returns for investors & Partners. Joe has invested in seed rounds with equity and tokens, along with a portfolio of Bitcoin, Ethereum, and other top cryptocurrencies.

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