Crypto tax loophole offers escape hatch for battered investors

There may be a silver lining for crypto investors selling at huge losses during the recent market turmoil: a quirk in the Tax Code that lets people minimize what they’ll owe the government down the road.

Unlike stocks and bonds, cryptocurrencies aren’t subject to federal rules that bar people from claiming deductions if they sell an asset at a loss and then buy an identical or similar asset within 30 days before or after the sale. That provides a unique opportunity for people suffering steep losses to sell and reap future tax savings, then buy more virtual tokens at cheaper prices, according to crypto tax filing software firms.

“This is a great time to store your capital losses, because when you exit the market at a future date at a huge gain, you can use these losses,” said Shehan Chandrasekera, head of tax strategy at software provider CoinTracker. Chandrasekera, who goes by @TheCryptoCPA on Twitter, has posted extensively about the strategy that he calls a “tax loss harvest.”

After surging 60% in 2021 — and touching an all time high of nearly $69,000 in November — Bitcoin has fallen 20% to under $37,000 this year. The impact of crypto’s January turmoil won’t show up on investor’s 2021 tax returns. However, thousands of crypto investors who piled into the asset class last year must account for those investments as they file their returns during the next few months.

Investors who sold crypto at a loss and then purchased similar assets at a lower price — a move that some refer to as wash sales — are free to take advantage of the tax strategy, according to TaxBit, a crypto tax software company. Some Democrats tried to close the loophole in a roughly $2 trillion spending bill that failed late last year.

“Our position at the company is: as it’s written now, wash sale rules are not in place,” said Michelle O’Connor, vice president of marketing at TaxBit. “So while they’re not in place, and the markets just getting tanked, get in, optimize, reset cost positions and take advantage of this legal tax strategy.”

O’Connor said that since the end of last week TaxBit has seen a big uptick in people using an online tool that helps customers take advantage of the losses. She also refers to the move as “tax-loss harvesting.”

Under the strategy, investors can use their losses to offset any gains in a given year. If they don’t have gain to offset, they can deduct up to $3,000 in losses from ordinary income. Any excess capital losses above that amount can be used to lower tax bills in subsequent years.