As the price of Bitcoin (hopefully temporarily) corrects, is it a good time to sell and buy back just to lock in a tax loss (U.S.)?
General
Bitcoin and other cryptocurrencies are subject to property tax rules if they are tradeable between users and can be exchanged for USD/other crypto (Notice 2014-21).
In general, the crypto would be a capital asset if acquired for investment purposes, meaning the purchase/sale/exchange of such crypto is subject to the capital gain rules.
Can I deduct a loss?
In the U.S., an individual taxpayer can deduct a capital loss up to $3,000 per year, and carry forward the remainder.
Wash Sale Rule
To prevent U.S. citizens from taking a loss on a stock sale for tax purposes and immediately buying back the stock, the wash sale rule was enacted.
If assets that are considered securities are sold at a loss, and then re-purchased within a 61 day window starting 30 days before the sale, or 30 days after the sale, then the loss on the initial sale is treated as if it never happened (i.e. disallowed). Then, the cost basis of the new securities purchased is the new price paid plus the loss on the first sale that was not allowed to be deducted. The result of the wash sale is: the basis in the securities held after the wash sale are the same as if the securities were never "washed" (sold and bought back). There are additional considerations when the stock is held in retirement accounts (i.e. IRA’s), gifted, etc.
Does Wash Sale apply to Bitcoin/Crypto in General
Technically, Bitcoin and most cryptocurrencies are not treated as securities, however the SEC will be classifying certain ICO crypto/tokens as securities. It is securities that are subject to the wash sale rule.
It is unclear whether a wash sale rule will eventually be expanded to apply to all crypto currency transactions (or the IRS will treat everything as a security), but we can expect for now, the rule applies to any ICO tokens the SEC deems securities.
Important Trading BTC futures or GBTC is likely considered a security subject to wash sale or subject to another similar provision of the law to prevent abuses to non-traders (however GBTC is also a trust for U.S. tax purposes, separate article coming). Consult a tax adviser.
Important This guidance does not apply to traders with a mark-to-market election. Consult a tax adviser.
However, only as a technicality, non-security crypto may be able to dodge this complex wash sale rule (although taking such approach is risky and future guidance could come out that disallows it). Consult a tax adviser regarding their thoughts on this matter before taking any action.
Tax Reform
Under tax reform, it is expected that like-kind exchanges only apply to real estate transactions going forward, so all crypto-for-crypto swaps will be taxable transactions. I will provide a separate article including effective date (tax year) of this new rule.Note, as I discussed in a prior article, it would have been very difficult to argue like-kind treatment even before tax reform came into play.
Takeaway
For me, it personally isn't worth it as (1) upon IRS audit the IRS could try and apply the wash sale rule even to non-securities, (2) or the IRS could cite anti-abuse rules buried in the 80,000 pages of tax code to prevent such deduction; plus (3) the transaction costs of the buying/selling will degrade my overall bitcoin holding just for a tax deduction. It's just too much hassle for a long-term believer. Also, (4) if I could successfully take a tax loss, my cost basis is lower for future sales of the cryptocurrency (the last price I paid). If I buy/sell in this correction, it is not with a plan to take advantage of tax losses.
What do you think, would you sell and buy back your Bitcoin to try and lock in a capital loss?
Disclaimer: This series contains general discussion of U.S. taxes in a developing and unclear area of tax law. As always, you should consult your own tax advisor in your jurisdiction to determine your specific situation as this is not personal advice; and consider any future guidance by the Congress/IRS after the date of this article. Under Circular 230 to the extent it applies, this article cannot be used or relied on to avoid any tax or penalties in the U.S., its States or any other jurisdictions. This post/book does not create a client relationship between the author and the reader. Last, this is not investment advice or a recommendation to buy/sell
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