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Hey folks, I think everyone at this point can agree that it’s been an extremely tough year for Crypto. If you bought anything 9–12 months ago and are still hodling, I’m guessing that like me, you’re probably sitting on at least a 50–70% (or even 90%) loss. Even if you have a bag of bluechips (i.e., BTC, ETH) you bought last year, then your portfolio is probably going to look something a bit like this:
For the same reasons why I think it’s important to sell at the top to take some profits, I would argue that at this time of year, it’s just as equally important to sell now to realize some of those losses.
Full disclaimer here, I am not a CPA by any means so none of this is financial or tax advice, especially considering that your tax jurisdiction might differ depending on where you live. For the purposes of this article, the speculations I’m going to talk about are Americentric, so please contact a tax consultant or financial advisor in your own jurisdiction that can speak to your own financial situation.
As 2022 is drawing to a close, likewise are your chances to try to game how much you might owe in taxes. This is where the Wash Sale Rule comes in.
Wash Sale Rule
When we’re talking about securities and taxes such as stocks, whenever you sell something off you’re essentially realizing the capital gain (or loss) of that stock. In a strategy known as Tax-Loss Harvesting (TLH), an investor can offset your capital gains that they may have made throughout the year by selling off their stocks that have lost value, or in other words, you can sell off your stocks that have lost money in relation to the price that you bought them at.
Generally speaking, in order for the loss to be truly realized you cannot rebuy the stock or security for at least 30-days. This is known as the Wash Sale Rule:
Therefore if I sell a share of COINBASE at $50 dollars on Monday, and then rebought them the following week — your losses would NOT be realized. Because Coinbase stock is a security, I would need to hold off on re-buying Coinbase for at least 30 days in order to realize my loss.
Once again, keep in mind that this is for securities — thankfully, although Gary Gensler might believe differently, cryptocurrencies haven’t officially been deemed securities in the eyes of the IRS…at least not yet.
How the IRS views Crypto
As “progress” is still slow grinding wheel in Congress for cryptocurrency-related legislation, to-date the IRS still considers Cryptocurrency as a “virtual currency,” rather than a security. This of course might be subject to change, but most tax software still reference Notice 2014–21 as a guideline, from which you’ll notice, doesn’t mention the word “security” once.
The good news for cryptocurrency holders is that the Wash Sale Rule technically does not apply, and instead you can instantaneously realize your losses by buying and reselling your crypto in order to realize your losses in seconds. This circumvention of the Wash Sale Rule can be extremely lucrative if you sold other crypto earlier in the year at a profit, or even if you’re trying to offset gains that you’ve made in actual securities, such as stocks or bonds.
Tracking your losses
We all know that a week in the cryptospace feels like a month in IRL, so if you’ve made 1000’s of transactions over the past year and don’t know where your gains/losses margins stand, then I would highly recommend opening up a account — it’s free and at least for me, it helps track all your wallet/exchange transactions in one place.
Last April I wrote an article about using Koinly for my taxes, but even if you don’t plan on using Koinly to compose the dreaded 8949 form, I’d still recommend opening a free account for the simple purpose being being able to see where you stand.
If you’ve done several hundred trades in the past year, for God’s sakes I hope that you’re not figuring out and entering everything manually. Call me lazy, but taxes are already more complicated than they should be, and personally when I do mine, I don’t want to open extra excel sheets if I don’t have to. From comparisons I’ve done to other platforms, Koinly is free to use, but when needing a compiler to file for taxes, Koinly offers some pretty competitive pricing plans, especially for the people that have a crazy amount of transactions:
In order to file correctly, you need to report your transactions/sales/gains/losses on each wallet/exchange that you have. So for instance, if I moved 1 BTC from Blockfi to my Metamask, and then later to KUCOIN to trade my BTC for ETH, that means that all this transactional data should be reported to Koinly for them to track accurately what your gains/losses may have been.
For each wallet exchange, you normally have more than one option of how to report that data — either have it read through syncing/API, or imported from a file (usually a csv file). I found out real quick that this was a problem, because some wallets (like Voyager, R.I.P.) don’t have an easy way to load your transactional data, you actually have to get an e-mailed request through the app. But for me I think this is what really put Koinly on top — For each wallet/exchange you’re trying to connect to Koinly, they have an in depth instructional video of how to do so with each one. This is something I thought was insanely helpful, because for each wallet/exchange, there may be some totally different way of how to obtain a csv of your transactions or your API keys.
Also, one final note, Koinly supports a ton of countries. Over 100 in fact. If you need to look up a specific one, check out an abbreviated list of the most popular ones or else you can e-mail them directly at [email protected] to find out.
Conclusion:
For me, it’s already been a tough year and the last thing I want to do is to be hit with more surprises finding that I need to pay more taxes next Spring. Using Tax-Loss Harvesting strategically can help bring that burden down, or at the very least, I’d argue that it would at least be responsible for people to get a better picture of what that tax burden might be.
In full transparency I only found out about Tax Loss Harvesting from one of my favorite youtubers InvestAnswers, but this was only after the close of 2021, making it a moot point to try to realize my losses after-the-fact. In 2022, I don’t plan on making the same mistake twice. If you yourself have had success (or failure) in Tax Loss Harvesting, I would love to hear about it in the comments below. If you’re interested in checking Koinly out yourself, please considering supporting this blog and using my referral link: https://koinly.io/?via=9412B5B5&utm_source=affiliate
Thanks for reading, and as always, please be sure to follow me on twitter to read all about my latest findings and updates: https://twitter.com/CryptosWith
Disclaimer: None of this information is financial advice or tax advice, and is just speculation from me, a random guy on the internet. Please consider this for purely educational and entertainment purposes. As always, please do your own research or contact a CPA or financial advisor to find what investments might be best for you.
