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Why I'm Selling Bitcoin:
Within the last 30 days, Bitcoin lost about 50% of its value…Ethereum is down about 40% from the peak….and, since I bought Bitcoin at regular intervals throughout the last few months…there’s a portion of my buy-in which has lost about 35% in value.
When that happens, you're able to sell and take advantage of a term called “Tax Loss Harvesting,” which is a tax reduction strategy that allows you to SELL non-performing assets that have LOST money, which allows you to OFFSET the tax you WOULD OTHERWISE owe on the assets that MADE you money.
Typically, this is most commonly used for people who invest in securities, like stocks and index funds…but, with CRYPTOCURRENCY…it’s a totally different, with some REALLY GOOD advantages.
With CRYPTOCURRENCY…”technically,” they’ve reported that it’s not a security…it’s a currency…and therefore, many people argue that the “Wash Sale Rule” doesn’t apply, which would THEREFORE allow you to sell – take the tax write off – and then buy back in, without worrying about that 30-day window.
The other advantage is that the IRS says you’re allowed to IDENTIFY which specific tax lots you want to sell…and then ONLY claim those losses against your other profits.
In this case, I have a chunk of recently purchased Bitcoin, all of which would be subject to short term capital gains at the very top of my tax bracket…that I could sell NOW, use THAT to offset other short term capital gains entirely..and then, I can rebalance my cryptocurrency portfolio to buy a little more Ethereum while it’s dropped in price, before buying BACK into Bitcoin.
Now, there is SOME worry that – because the IRS isn’t calling cryptocurrency a security, and because the “WASH SALE” doesn’t apply…they might use something called the “Economic Substance Doctrine” to try to get their profits. This is a tax law that says a transaction must have economic significance, aside from a tax benefit…or, basically, a transaction that does NOTHING ELSE but generate a tax benefit is invalid under this doctrine.
HOWEVER…others argue that, technically, considering how volatile Bitcoin is…the mere act of SELLING exposes you to market risk…and therefore, even if you buy in the same cryptocurrency shortly afterwards…the “Economic substance doctrine” wouldn’t apply.
This ALSO wouldn’t apply if you use those proceeds to buy a totally different cryptocurrency, like – lets say you sold your bitcoin at a loss to buy Ehtereum….that’s totally fine…and, even though there’s no evidence that this has ever been an issue, all of this is just something to consider as a precaution.
And finally, THIRD…by selling a portion of your investment, and then buying it back later…you are “resetting” your cost basis and holding period, which starts over as soon as you make a new purchase.
This might not be a big deal if you just bought in a month ago…but, if you’re a few days away from being able to capture a long term capital gain, and you think tax rates are going up…it MIGHT be a better idea to hold off from selling until after that one year has passed. In my case, I’m selling off short term purchases…I’m too far away from being able to lock in lower long term capital gains tax rates…and for my situation, selling off the top end of my Bitcoin just makes the most sense.
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