by Alex Woodin | Oct 29, 2022 | Commentary |
A gaping hole in the tax code currently allows for a major tax-loss harvesting opportunity for cryptocurrency investors who are holding onto their crypto positions at a loss by allowing for wash sales (for now). But what does this all mean? What is tax loss harvesting? Tax-loss harvesting consists of strategically selling an investment at a loss, with the intention of using that capital loss to offset the amount of capital gains tax from the sale of other investments that resulted in a profit, in order to improve the after-tax return on taxable investments. Sophisticated investors often utilize this strategy to offset short-term capital gains, which are taxed as ordinary income, which is typically a higher tax rate than the long-term capital gains tax rate (37% for the top individual income tax bracket vs. 20% for the top capital gains tax bracket). https://www.nerdwallet.com/article/taxes/federal-income-tax-brackets;https://www.nerdwallet.com/article/taxes/capital-gains-tax-rates. Tax-loss harvesting can also be used to offset long term capital gains. https://www.investopedia.com/terms/t/taxgainlossharvesting.asp. Additionally, if an investor’s capital losses exceed your capital gains, the investor can lower their income by their total net loss for the year, up to $3,000. https://www.irs.gov/taxtopics/tc409. If the total net loss exceeds $3,000, the investor can carry forward the remaining net capital loss indefinitely to future years until the amount is exhausted. https://www.investopedia.com/terms/c/capital-loss-carryover.asp#:~:text=Capital%20losses%20that%20exceed%20capital,until%20the%20amount%20is%20exhausted. What is a wash sale, and what is the wash-sale rule? A wash sale occurs when an investor sells or trades a security at a loss, and within 30 days before or after the sale, the investor either buys the same or a substantially identical stock or security, or acquires an option to do so. https://www.investor.gov/introduction-investing/investing-basics/glossary/wash-sales. Also, If the...
