Page 8 - BusinessWest November 28, 2022

Tax-loss Harvesting and Crypto
This Strategy May Help You Navigate ‘Wash-sale’ Rule
By Sean Wandrei
It is that time of year when taxpayers are looking for ways to reduce their tax liability. It has been a volatile year for the stock and
cryptocurrency markets. There may have been some capital gains generated in the beginning of the year when stocks were sold and the markets were doing better than they are now. Now, as the year has progressed, there may be stocks that you are holding that have declined in value. These stocks are ripe for tax-loss har- vesting.
Tax-loss harvesting is a strategy used to rec- ognize capital losses by selling capital assets
that have declined in value to offset capital gain already recognized. If you have capital gains from stocks that you have sold during the year, you can offset those gains by selling other stocks that have declined in value to generate a capital loss. The capital losses would offset the capital gains that would reduce the amount of taxes
that would be paid on those gains by eliminating them. If you end up with capital losses in excess of capital gains during the year, you can deduct up to $3,000 of the net capital loss in the current year. Any capital loss in excess of $3,000 would be carried forward and used to offset future capital gains.
There could be an issue with this strategy, as
the ‘wash-sale rule’ could limit its effectiveness. The wash-sale rule states that, if you are deduct- ing a loss, you cannot buy a ‘substantially identi- cal’ stock or security for 30
days up to the date of sale and 30 days after. If you do, the capital loss may be disal- lowed. This could be an issue when you sell a stock that you want to stay in, just to generate a capital loss.
‘Substantially identical’
generally means you cannot
sell Tesla stock and reacquire
Tesla right before or after the
sale. If you are selling your
Tesla stock just to generate losses and still want to be in Tesla stock, you need to wait 30 days to reacquire it.
What if you are investing in cryptocurrencies? The two most popular cryptocurrencies are Bit- coin and Ethereum, but there are hundreds more that you could invest in. Cryptocurrency prices can be volatile and widely fluctuate throughout the year. Bitcoin has dropped from a price of $66,000 per coin to $16,000 over the past year. Ethereum has seen similar declines over the year.
There may have been many investors who got
into the cryptocurrency game hoping to ride the wave of optimism and are now looking at their portfolio, which shows built-in capital losses on
“
used to recognize capital losses by selling capital assets that have de- clined in value to offset capital gain already recognized.
their cryptocurrency investments. In 2014, the IRS declared cryptocurrencies to be a capital asset. As of this writing, cryptocurrencies are
not stocks or securities and do not fall under the wash-sale rules. There has been some discus- sion in Washington, D.C. to expand the wash-sale rules to include cryptocurrencies, but as of now, that has not materialized.
If you believe in the underlying blockchain technology and
Tax-loss harvesting is a strategy
”
the cryptocurrency associated with it,
Crypto
Continued on page 73
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8 NOVEMBER 28, 2022
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