CLIENT KNOWLEDGE BASE

    Locking in Crypto Losses

    Strategically Selling Cryptocurrency to Lock In Capital Losses

    At Anomaly, we love loopholes when it comes to tax strategy!   This is a strategy dozens of our clients have used to offset large capital gains tax bills.  

    Selling cryptocurrency at a loss and immediately rebuying it to lock in that loss—sometimes referred to as “tax-loss harvesting” is a strategy many crypto investors consider. 
    Under current U.S. tax law, cryptocurrency is generally treated as property (not a security), so the “wash sale” rules that apply to stocks and mutual funds typically do not apply to crypto.* 
    As a result, you could potentially capture a capital loss for tax purposes and still maintain your overall investment exposure in the crypto asset.


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      Overview of the Tax Strategy

      1. Sell at a Loss: You sell a cryptocurrency that is trading below your cost basis. 
      2. Lock In the Capital Loss: When you sell, you realize a capital loss (the difference between your original purchase price and your sale price). 
        1. This loss can offset other capital gains, including stock market gains, or possibly reduce your taxable income by up to certain limits.
      3. Rebuy the Asset Immediately (or Soon After):Unlike stocks and securities, crypto is currently not explicitly covered by the wash sale rule in the U.S. T
        1. therefore, you can rebuy the same cryptocurrency right away without “invalidating” the capital loss...

      If you have already recognized capital gains from other investments, applying these crypto losses can reduce or eliminate the tax you owe on those gains. If you don’t have any gains to offset, you can often carry forward those losses to future tax years (we call this banking tax assets at Anomaly)
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      Key Points to Understand

      • Crypto vs. Securities: The wash sale rule typically applies to stocks, bonds, and other securities. Because the IRS classifies crypto as “property,” it is not (yet) subject to the wash sale rule. However, tax laws can change and the IRS really wants Congress to fix this!

      • Holding Period Reset: When you rebuy crypto, your new holding period for long-term/short-term capital gains purposes starts from the date of your new purchase.
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      Tangible Examples

      Example A: Offset Current Year Gains

      1. Initial Purchase: John buys 1 Bitcoin (BTC) at $40,000.
      2. Later Sale at a Loss: The price drops to $30,000. Alex sells 1 BTC, locking in a $10,000 capital loss.
      3. Immediate Repurchase: Right after selling, Alex rebbuys 1 BTC at $30,000.  He still owns 1 BTC!

      4. Tax Outcome:
        • Alex realizes a $10,000 capital loss. This loss can be used to offset any other capital gains in the current year.
        • If Alex had no other capital gains, the loss may offset up to $3,000 of ordinary income and the balance can be carried forward.
        • Alex’s new cost basis in the BTC is $30,000 (the purchase price after the sale).

      In this scenario, Alex essentially stays “in the market,” because they end up with the same amount of BTC, but they have captured a $10,000 loss that can reduce taxes.

      Example B: Harvesting Losses for Future Gains

      1. Initial Purchase: Taylor buys 2 Ether (ETH) at $3,000 each (total $6,000).
      2. Market Drop & Sell: The market price drops to $2,000 per ETH, so Taylor sells both ETH for $4,000. This creates a $2,000 capital loss ($6,000 – $4,000).
      3. Immediate Rebuy: Taylor repurchases 2 ETH at $2,000 each, so the total investment remains $4,000.
      4. Offsetting Future Gains:
        • Taylor has now locked in a $2,000 capital loss, which can be used to offset other capital gains this year or in future years.
        • Taylor remains invested in ETH, so if the price rebounds, any future capital gains are calculated from the new, lower cost basis (now $4,000 total).
      Overall - this is a pretty straightforward technique to execute but of course, be careful when it comes to investing in crypto and selling for tax purposes, as its not without risk of rapid fluctuation.  However, if you are facing large capital gains this year OR plan to sell an asset resulting in a gain, consider this strategy as its a legal and simple method to reduce your capital gains tax bill!
    If you still have a question, we’re here to help. Contact us