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As the price of bitcoin has decreased from its peak in January, investors now have the opportunity to potentially benefit from tax advantages, according to financial experts.
Following a post-election surge that saw the flagship cryptocurrency reach a record high of $109,000 on inauguration day, it has since declined, trading around $84,000 by midday Friday, with some fluctuations taking it below $80,000, as reported by Coin Metrics.
This recent decline in bitcoin’s value presents a unique opportunity for tax planning, especially through a strategy known as tax-loss harvesting. Andrew Gordon, a tax attorney and certified public accountant, highlights this as a key moment for investors, especially as discussions in Congress may alter available tax strategies.
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Tax-loss harvesting allows investors to offset gains by selling underperforming assets in a taxable account. When losses outpace gains, investors can deduct up to $3,000 annually from their ordinary income, with the option to carry forward losses into subsequent tax years.
Many investors traditionally wait until the end of the year to execute tax-loss harvesting strategies, but financial experts recommend acting sooner, given the volatility often displayed by cryptocurrencies throughout the year.
“Continuous monitoring for these opportunities is advisable,” Gordon said, emphasizing the importance of seizing such moments as they arise.
Understanding the crypto wash sale ‘loophole’
When it comes to selling investments, the wash sale rule generally prevents investors from claiming losses if they repurchase a similar asset within 30 days before or after the sale. However, this rule does not currently apply to cryptocurrencies, creating a beneficial situation for long-term holders of digital currencies.
“For example, if an investor sells bitcoin at a loss today and then buys it back the next day, they can still claim that loss,” Gordon noted. “This is a particularly effective tactic for cryptocurrency investors since it allows them to maintain their positions.”
Nonetheless, this advantageous strategy could be at risk as Congressional Republicans explore funding avenues for future tax legislation. In 2023, Senators Cynthia Lummis and Kirsten Gillibrand reintroduced a bill designed to create a regulatory framework for cryptocurrencies, which included provisions to close this particular loophole. Additionally, former President Biden’s proposed budget for fiscal year 2025 also outlined measures that could impact how cryptocurrencies are taxed.
In the interim, as Markowitz from Luminary Tax Advisors observed, “This loophole is one that the IRS provides, so we might as well take advantage of it.” Investors must always weigh their overall investment goals and timelines before implementing any specific tax strategies.
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