While the falling crypto marketplace throughout 2018 has hurt investor wallets, it may provide some relief come tax season. According to an article published by The Wall Street Journal on Dec. 21, the plummeting value for Bitcoin and altcoins in the current bear market, with BTC prices having their worst month in November since August 2011, provides a method for investors to save on taxes, suggesting,
While many have lampooned the abysmal rates of crypto reporting for taxation purposes in the United States–a number which is estimated to be below 1% of investors according to some reports–the convoluted nature of the tax code has been a tough pill for most to swallow. The current United States tax policy towards cryptocurrency has been criticized for imposing unrealistic and unnecessary hurdles for frequent traders to follow, with investors petitioning for a reformed set of guidelines that treats the digital asset in the context of practicality.
Now, The Wall Street Journal claims that the classification for cryptocurrency as an investment property theoretically provides an avenue for investors to recoup on losses through more favorable taxation. As opposed to traditional fiat currencies, Bitcoin and other cryptocurrencies are beholden to tax laws that apply to investment property, such as stocks and bonds.
Accordingly, as digital assets, cryptocurrencies are regulated by short-term gains and losses versus long-term, with the distinction being applied to investments held for less than one year. In the case of the former, a short-term gains tax can reach as high as 40.8 percent of the profit made on buying and selling assets in less than one year. Long-term gains are more favorable to “hodlers,” with taxation topping out at 23.8 percent.
While crypto traders have lamented taxation laws being applied to the asset, which functions and is bought and sold similarly to fiat currencies, it does allow for investors to benefit from the favorable rules that apply to stock and bonds. According to the WSJ report, cryptocurrencies in particular have access to a “quirk” in the U.S. tax code which allows traders to buy and sell assets immediately without being subject to “wash sale’ penalties. Compared to stocks, bonds and other investment properties subject to the aforementioned regulations, cryptocurrency investors are free to execute trades on assets held for less than thirty days while still benefiting from capital loss deductions.
This small insight, unavailable to investors in traditional stock and bond markets, has led the WSJ to conclude that most cryptocurrency investors would benefit from selling and repurchasing cryptos for the tax-harvesting benefits. Jim Calvin, a CPA and crypto specialist for Deloitte Tax, was quoted in the WSJ as recommending traders sell and re-buy assets for as little as an hour up to a day following a loss in order to recoup tax benefits from the depreciating asset.
At the very least, crypto investors and frequent traders can use the current bear market to their advantage, in addition to the small relaxation in tax code, to recoup some of their losses sustained throughout 2018.