Tax Loophole for Crypto Holders

January 16, 2022 3:50 pm Comments

Recent market movement in the crypto industry indicates that prices of many cryptos including Bitcoin have gone down significantly from their all-time highs back in November.

That may normally be a bad thing, but there is actually a way to take advantage of this from a tax perspective.

Currently, the IRS treats crypto the same as any other property or asset in the sense that you have to pay a tax every time you spend, exchange, or sell them.

Each time that happens, a taxable event is created which makes it essentially the same as other types of assets that are frequently traded such as stocks or ETFs.

Unknown to the majority of people, there is an interesting trick where able to significantly reduce the amount of tax that you owe the IRS.

CNBC explains:

When you sell your crypto, you can pick and choose the specific unit you are selling.

That means a crypto holder can pick out the most expensive bitcoin they bought and use that number to determine their tax obligation. A higher cost basis translates to less tax on your sale.

But the onus is on the user to keep track, so thorough bookkeeping is essential. Without detailed records of a taxpayer’s transaction and cost basis, calculations to the IRS can’t be substantiated.

“People rarely use it because it requires keeping good records or using crypto software,” explained Shehan Chandrasekera, a CPA and head of tax strategy at crypto tax software company

“But the thing is, lots of folks now use that kind of software, which makes this kind of accounting super easy. They just don’t know it exists.”

The trick to HIFO accounting is keeping granular details about every crypto transaction you made for each coin you own, including when you purchased it and for how much, as well as when you sold it and the market value at that time.

In addition to the HIFO rule, there is also an additional rule called the wash sale rule that will be able to save taxpayers even more money potentially.

The trick here is to make it look like you have minimal gains and using effective tax-loss harvesting.

Kiplinger explains:

Investors use wash sales to maximize the tax deductions allowed after selling a position in a loss-making security.

For example, if an investor sells a security at the end of the calendar year and then repurchases it at the start of the new year, he or she could lock in a loss for tax purposes but remain invested in the security going forward.

The essential part is that the wash sale rule does not apply to crypto assets currently which allows investors to utilize it to reduce taxes.

Therefore, it is important that crypto investors learn to take advantage of this as there is a chance that the rule may one day apply to crypto the same way it does for other financial instruments like stocks or indices.

It is unknown how long this window of opportunity will last, but well-informed investors will stand to gain from these unique tax loopholes that can greatly reduce your taxes.

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