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As the price of bitcoin drops from its peak in January, experts suggest that some investors might take advantage of potential tax breaks.
After a rally following the elections, the leading digital currency peaked at $109,000 on inauguration day before beginning its decline in February. As of midday Friday, it had settled at around $84,000, after briefly falling below $80,000 overnight, according to Coin Metrics.
This recent downturn offers a unique chance for tax planning, including a “loophole” that could vanish amidst ongoing Congressional tax discussions, as explained by Andrew Gordon, a tax attorney, CPA, and president of Gordon Law Group.
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The approach known as “tax-loss harvesting” permits investors to offset gains from successful investments by selling underperforming assets within a taxable account. If your losses surpass your gains, you can deduct up to $3,000 from your regular income each year and carry any excess losses into subsequent years.
Many investors postpone tax-loss harvesting until December, but financial experts warn that this could be unwise given the year-round volatility of assets, particularly in the cryptocurrency market.
“You should consistently seek out these opportunities and capitalize on them as they arise,” Gordon advised.
Consistently seek out these opportunities and capitalize on them as they arise.
Andrew Gordon
President of Gordon Law Group
Understanding the crypto wash sale ‘loophole’
When it comes to selling investments, the wash sale rule prohibits claiming a loss if you buy back a “substantially identical” asset within 30 days before or after the sale.
Currently, this wash sale rule does not extend to cryptocurrency, which could be advantageous for long-term crypto investors, according to experts.
“If you sell bitcoin at a loss today and repurchase it tomorrow, you still retain the loss on your records,” Gordon explained. “This is a highly effective strategy for cryptocurrency investors, as it allows them to maintain their positions.”
However, this strategy may be at risk of elimination in the future, as Congressional Republicans look for methods to support President Donald Trump’s tax initiatives.
In 2023, Senators Cynthia Lummis, R-Wyo., and Kirsten Gillibrand, D-N.Y., reintroduced a regulatory framework for cryptocurrency, which includes provisions to close the crypto wash sale loophole. Additionally, former President Joe Biden’s proposed budget for fiscal year 2025 encompassed this measure.
For now, “the IRS grants us this loophole. We might as well utilize it,” stated Adam Markowitz, an enrolled agent at Luminary Tax Advisors in Windermere, Florida, during a previous conversation with CNBC.
Always remember to evaluate your investment objectives and time horizon before applying any tax strategies.
