It’s been an unnerving time to be a crypto currency investor. Many investors have seen the value of their holdings decline precipitously over the past several months. For example, Bitcoin is down nearly 70 percent from its all-time high of $68,789, which occurred in November of 2021. Ethereum is down a similar amount from its all-time high of $4,891.
Despite those drastic drops, there could be a silver lining for those who still believe in crypto: wash sales … at least for the time being.
While Cresset did not drive or recommend crypto currency purchases for our clients, a wash sale could be beneficial to those who do carry them in their portfolios. A wash sale refers to an IRS regulation that prohibits investors from taking a tax deduction when selling or trading a security (e.g. stocks, bonds) at a loss and then repurchasing that same or substantially similar security within 30 days of the transaction. That rule is meant to prevent investors from realizing an investment loss just for the benefit of a tax deduction while maintaining a position in the security.
However, the IRS wash sale regulation applies only to “securities.” Because the IRS does not currently define crypto currencies as securities, they are not subject to the wash sale rules.
So, for crypto investors who’ve experienced a loss (which is the vast majority of crypto investors at this point in time), and who believe that crypto will once again rise in value, taking advantage of the wash sale exception can make a lot of sense. Not only can those investors deduct the losses they’ve experienced on their taxes, but they can jump right back into the market and buy the same crypto currencies at their current depressed valuations, with the hope that those investments will once again appreciate in value.
However, this opportunity may be fleeting. The exception to the wash sale rule may disappear if legislation that has been proposed is passed. And while the Congressional “fix” has not yet made it into the tax code after a few recent tries, there is sufficient appetite in Washington to keep pushing Congress to act soon.
So, if you are a crypto investor who has experienced a loss, but who still believes in the future of crypto currencies, the time to act is now.