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.
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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1Overview of the Tax Strategy
- Sell at a Loss: You sell a cryptocurrency that is trading below your cost basis.
- Lock In the Capital Loss: When you sell, you realize a capital loss (the difference between your original purchase price and your sale price).
- This loss can offset other capital gains, including stock market gains, or possibly reduce your taxable income by up to certain limits.
- 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
- therefore, you can rebuy the same cryptocurrency right away without “invalidating” the capital loss...
- therefore, you can rebuy the same cryptocurrency right away without “invalidating” the capital loss...
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2Key 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.
- 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!
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3Tangible Examples
Example A: Offset Current Year Gains
- Initial Purchase: John buys 1 Bitcoin (BTC) at $40,000.
- Later Sale at a Loss: The price drops to $30,000. Alex sells 1 BTC, locking in a $10,000 capital loss.
- Immediate Repurchase: Right after selling, Alex rebbuys 1 BTC at $30,000. He still owns 1 BTC!
- 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).
Example B: Harvesting Losses for Future Gains
- Initial Purchase: Taylor buys 2 Ether (ETH) at $3,000 each (total $6,000).
- 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).
- Immediate Rebuy: Taylor repurchases 2 ETH at $2,000 each, so the total investment remains $4,000.
- 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).
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