Loophole: Harvest Tax Losses on Cryptocurrency

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Because cryptocurrencies are classified as “property” rather than as securities, the wash-sale rule does not apply to them. (The wash-sale rule prohibits a taxpayer from deducting a loss on a sale of an investment that was replaced with the same or a "substantially identical" investment 30 days before, on the day of the sale, or 30 days after the sale.)


Let’s look at how to harvest crypto losses:

• When a currency you own has substantial unrealized losses you can sell to generate losses that are not limited to $3,000 per year.

• You can immediately replace your position in the currency without invoking the wash sale rule that would otherwise prohibit you from deducting the loss.

• This allows you to take losses without losing your position in the currency investment. You do incur trading expenses, however.


1. You can keep your cryptocurrency.

2. You can deduct your losses.
Planning point. If you want to harvest losses, make sure you hold a cryptocurrency and not a security.

This is like having your cake and eating it too!