- Bitcoin finishes the year off in a slump but investors could take advantage of the down price.
- The wash sale rule that applies to most securities doesn’t apply to cryptocurrencies.
- Crypto traders can sell at a loss to offset capital gains taxes and buy back in at the same price.
Bitcoin is closing the year off with a 32% slump from its November all-time high of about $68,000. On Friday, the crypto was trading at around $46,000.
Many investors had been bracing for a year-end parabolic bull run that would see bitcoin reach peaks as high as $100,000. But that expectation has now been pushed off to 2022. But investors can take advantage of a tax loophole while they wait for the cryptocurrency’s comeback.
Popular consensus from technical analysts like Scott Melker, host of the “Wolf Of All Streets” podcast, and Carl Runefelt, a crypto investor and influencer, suggests bitcoin’s price is likely to consolidate sideways for a few months, hovering around $40,000s to $50,000.
Runefelt previously told Insider the huge correction seen in bitcoin’s price means buyers need time to gain back momentum.
But once bitcoin is able to break above $53,000 consistently, it could hit six figures and even see a $300,000 price tag sometime in 2022, Runefelt previously told Insider.
Until then, investors who’ve taken a hit could use it as a tax break. In general, capital gains losses can offset taxes owned on gains.
One advantage crypto has over stocks is that the wash sale rule doesn’t apply to it. A wash sale is when a security is sold at a loss and repurchased shortly after. When this is done with securities, any losses incurred are not deductible.
Some seasoned crypto traders purposely sell their digital assets below the purchase price and then buy them back at the same or similar price to take advantage of this tax-loss harvesting rule.
Since cryptocurrencies are generally viewed as property rather than security, this tax loophole is available. However, future regulations may bring it to an end.
The sale technically triggers a capital gains loss. But since the investor re-enters the position at a similar price, they are still in the game waiting for the next rally. For this to be successful, an investor must be confident that the crypto’s price will go up in the future.
Although crypto is highly volatile, large-cap coins such as bitcoin and ethereum have continued to go up over time, regardless of how steep the plunges have been. Although the same may not be true for riskier smaller cap cryptos.