Tax Loss Harvesting and Cryptocurrency

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sociologydude76
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Tax Loss Harvesting and Cryptocurrency

Post by sociologydude76 »

Each movement of crypto is a taxable event. So sending crypto to another address or converting it is taxable.

But what about if you move crypto at a much lower rate than you bought it. Does this offset gains?

For example, I buy XYZ coin when it's $1000. Then XYZ plummets to $500. If I send my XYZ coin to another wallet, doesnt this count as a loss of $500? By doing this, would I offset some of my gains?
Makefile
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Re: Tax Loss Harvesting and Cryptocurrency

Post by Makefile »

Oh wow. We can't even all agree on whether and when different mutual funds can be substantially identical. I believe your example, even if it is really a sale (it sounds more like switching assets from Vanguard to Fidelity, for example, without selling), the exact same currency should obviously be seen as substantially identical and thus this would be a wash sale.
Gadget
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Re: Tax Loss Harvesting and Cryptocurrency

Post by Gadget »

Sending crypto to another address is not a taxable event. You are retaining possession of your crypto, and it's the same "property". It's like moving stocks in kind from one brokerage to another.

It is only a taxable event if you convert your crypto to another type, or you sell it. Staked crypto is also taxable.

It's the wash sale rules that are tricky and not clarified. Since it is treated as property, there is no wash sale rule like stocks per se. But some bogleheads posted some other tax laws that made it sound like it was likely still against the rules to count tax losses unless you were converting to another token. I'm not sure I've seen any definitive answers regarding crypto wash sale rules.
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grabiner
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Re: Tax Loss Harvesting and Cryptocurrency

Post by grabiner »

Gadget wrote: Sat May 15, 2021 10:15 pm Sending crypto to another address is not a taxable event. You are retaining possession of your crypto, and it's the same "property". It's like moving stocks in kind from one brokerage to another.

It is only a taxable event if you convert your crypto to another type, or you sell it. Staked crypto is also taxable.

It's the wash sale rules that are tricky and not clarified. Since it is treated as property, there is no wash sale rule like stocks per se. But some bogleheads posted some other tax laws that made it sound like it was likely still against the rules to count tax losses unless you were converting to another token. I'm not sure I've seen any definitive answers regarding crypto wash sale rules.
The wash sale rule is a specific IRS rule: if you do X, you cannot deduct the loss.

But the IRS has general rules such as "economic substance" which may also disallow losses; you cannot normally deduct a loss from a transaction which has no purpose except for the tax effect. If you bought bitcoins (or gold) for $10K, sold them for $5K, and then immediately bought more bitcoins (or gold) for $5K, your transaction had no economic substance, so the IRS might disallow the loss on those grounds. In contrast, if you sold bitcoins for a loss and bought gold, or sold gold for a loss and bought silver, that is a transaction which does have economic substance; you switched to a different asset which has a potential for different returns.

Please check with your tax advisor for what should be deductible when engaging in tax-avoidance transactions; they may be legitimate, but only your tax advisor can give you tax advice.
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Gadget
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Re: Tax Loss Harvesting and Cryptocurrency

Post by Gadget »

grabiner wrote: Mon May 17, 2021 8:40 pm
Gadget wrote: Sat May 15, 2021 10:15 pm Sending crypto to another address is not a taxable event. You are retaining possession of your crypto, and it's the same "property". It's like moving stocks in kind from one brokerage to another.

It is only a taxable event if you convert your crypto to another type, or you sell it. Staked crypto is also taxable.

It's the wash sale rules that are tricky and not clarified. Since it is treated as property, there is no wash sale rule like stocks per se. But some bogleheads posted some other tax laws that made it sound like it was likely still against the rules to count tax losses unless you were converting to another token. I'm not sure I've seen any definitive answers regarding crypto wash sale rules.
The wash sale rule is a specific IRS rule: if you do X, you cannot deduct the loss.

But the IRS has general rules such as "economic substance" which may also disallow losses; you cannot normally deduct a loss from a transaction which has no purpose except for the tax effect. If you bought bitcoins (or gold) for $10K, sold them for $5K, and then immediately bought more bitcoins (or gold) for $5K, your transaction had no economic substance, so the IRS might disallow the loss on those grounds. In contrast, if you sold bitcoins for a loss and bought gold, or sold gold for a loss and bought silver, that is a transaction which does have economic substance; you switched to a different asset which has a potential for different returns.

Please check with your tax advisor for what should be deductible when engaging in tax-avoidance transactions; they may be legitimate, but only your tax advisor can give you tax advice.
This makes sense logically. But let's say I sell bitcoin for a loss and buy Ethereum. How long do I have to hold ETH before I can switch back to bitcoin if I want to harvest my losses? Is it still 30 days like stocks? Or do all cryptocurrencies count as the same type of property, and you can't harvest losses between them? That's the part I haven't seen clarified anywhere.
SlowMovingInvestor
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Re: Tax Loss Harvesting and Cryptocurrency

Post by SlowMovingInvestor »

Gadget wrote: Tue May 18, 2021 8:06 pm
grabiner wrote: Mon May 17, 2021 8:40 pm
Gadget wrote: Sat May 15, 2021 10:15 pm Sending crypto to another address is not a taxable event. You are retaining possession of your crypto, and it's the same "property". It's like moving stocks in kind from one brokerage to another.

It is only a taxable event if you convert your crypto to another type, or you sell it. Staked crypto is also taxable.

It's the wash sale rules that are tricky and not clarified. Since it is treated as property, there is no wash sale rule like stocks per se. But some bogleheads posted some other tax laws that made it sound like it was likely still against the rules to count tax losses unless you were converting to another token. I'm not sure I've seen any definitive answers regarding crypto wash sale rules.
The wash sale rule is a specific IRS rule: if you do X, you cannot deduct the loss.

But the IRS has general rules such as "economic substance" which may also disallow losses; you cannot normally deduct a loss from a transaction which has no purpose except for the tax effect. If you bought bitcoins (or gold) for $10K, sold them for $5K, and then immediately bought more bitcoins (or gold) for $5K, your transaction had no economic substance, so the IRS might disallow the loss on those grounds. In contrast, if you sold bitcoins for a loss and bought gold, or sold gold for a loss and bought silver, that is a transaction which does have economic substance; you switched to a different asset which has a potential for different returns.

Please check with your tax advisor for what should be deductible when engaging in tax-avoidance transactions; they may be legitimate, but only your tax advisor can give you tax advice.
This makes sense logically. But let's say I sell bitcoin for a loss and buy Ethereum. How long do I have to hold ETH before I can switch back to bitcoin if I want to harvest my losses? Is it still 30 days like stocks? Or do all cryptocurrencies count as the same type of property, and you can't harvest losses between them? That's the part I haven't seen clarified anywhere.
I don't understand your question. It doesn't matter whether you sell BTC for cash or whether you sell it for ETH. The issue is buying BTC back.

Ethereum is clearly different from BTC, so selling BTC and buying Ether will not by itself cause a problem.

Different cryptocurrencies (excluding something like tokens that are derivatives of others, such as Wrapped Tokens) are clearly not the same type of property.
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luckyducky99
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Re: Tax Loss Harvesting and Cryptocurrency

Post by luckyducky99 »

sociologydude76 wrote: Sat May 15, 2021 9:46 pm sending crypto to another address ... is taxable.
Can you give a citation for this? How is this different from transferring stocks between brokerages without selling, which is not taxable?
Gadget
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Re: Tax Loss Harvesting and Cryptocurrency

Post by Gadget »

luckyducky99 wrote: Tue May 18, 2021 9:06 pm
sociologydude76 wrote: Sat May 15, 2021 9:46 pm sending crypto to another address ... is taxable.
Can you give a citation for this? How is this different from transferring stocks between brokerages without selling, which is not taxable?
There is no citation for that. Sending crypto to another address is NOT taxable.
Gadget
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Re: Tax Loss Harvesting and Cryptocurrency

Post by Gadget »

SlowMovingInvestor wrote: Tue May 18, 2021 8:13 pm
Gadget wrote: Tue May 18, 2021 8:06 pm
grabiner wrote: Mon May 17, 2021 8:40 pm
Gadget wrote: Sat May 15, 2021 10:15 pm Sending crypto to another address is not a taxable event. You are retaining possession of your crypto, and it's the same "property". It's like moving stocks in kind from one brokerage to another.

It is only a taxable event if you convert your crypto to another type, or you sell it. Staked crypto is also taxable.

It's the wash sale rules that are tricky and not clarified. Since it is treated as property, there is no wash sale rule like stocks per se. But some bogleheads posted some other tax laws that made it sound like it was likely still against the rules to count tax losses unless you were converting to another token. I'm not sure I've seen any definitive answers regarding crypto wash sale rules.
The wash sale rule is a specific IRS rule: if you do X, you cannot deduct the loss.

But the IRS has general rules such as "economic substance" which may also disallow losses; you cannot normally deduct a loss from a transaction which has no purpose except for the tax effect. If you bought bitcoins (or gold) for $10K, sold them for $5K, and then immediately bought more bitcoins (or gold) for $5K, your transaction had no economic substance, so the IRS might disallow the loss on those grounds. In contrast, if you sold bitcoins for a loss and bought gold, or sold gold for a loss and bought silver, that is a transaction which does have economic substance; you switched to a different asset which has a potential for different returns.

Please check with your tax advisor for what should be deductible when engaging in tax-avoidance transactions; they may be legitimate, but only your tax advisor can give you tax advice.
This makes sense logically. But let's say I sell bitcoin for a loss and buy Ethereum. How long do I have to hold ETH before I can switch back to bitcoin if I want to harvest my losses? Is it still 30 days like stocks? Or do all cryptocurrencies count as the same type of property, and you can't harvest losses between them? That's the part I haven't seen clarified anywhere.
I don't understand your question. It doesn't matter whether you sell BTC for cash or whether you sell it for ETH. The issue is buying BTC back.

Ethereum is clearly different from BTC, so selling BTC and buying Ether will not by itself cause a problem.

Different cryptocurrencies (excluding something like tokens that are derivatives of others, such as Wrapped Tokens) are clearly not the same type of property.
I mean I think ETH is clearly different than BTC. But does the IRS? Have they clarified that?

And I understand the issue is buying BTC back in the example. But is there a 30 day limit on that wash sale rule like stocks? If we make the assumption that ETH and BTC can be tax loss harvested per IRS rules?
wcmiker
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Re: Tax Loss Harvesting and Cryptocurrency

Post by wcmiker »

A16 states exchanging a virtual currency for another virtual currency will result in a capital gain or loss.
https://www.irs.gov/individuals/interna ... ansactions

Wash sale rules apply to securities. Since cryptocurrency is not classified as a security, wash sale rules do not apply. Cryptocurrency can be tax loss harvested because it is investment property rather than personal use property.
ras4250
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Re: Tax Loss Harvesting and Cryptocurrency

Post by ras4250 »

Picking up on this topic.

Much of the advice is to consult with your tax advisor, but most CPA's can't answer this question (I know mine couldn't) and I would imagine only big investors with expensive tax lawyers have looked into this. I have not found anything else definitive. This company https://taxbit.com/ says that tax loss harvesting is easy and wash sale rules do not apply. I understand the security v. property difference, but is there anything published about the "economic substance" rule being applied by the IRS to disallow a loss? Surely by now some of the larger traders/investors have used it?

The other issue that I see is how do you allocate lots? There are no "shares" of BTC. You buy some and it accumulates. Example, if I purchased 0.25 BTC at $20k and then 0.25 BTC at $50k and then I sell 0.25 BTC at $35k to book a "loss" on the 0.25 BTC I bought at $50k. Do I just say that the 0.25 BTC I sold was the 0.25 BTC bought at $50k? Does it have to follow some First In First Out or other rule?
HootingSloth
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Re: Tax Loss Harvesting and Cryptocurrency

Post by HootingSloth »

It is correct that most CPAs will probably not be able to answer this question, and that a tax lawyer is a more appropriate person to answer this kind of question. It is also correct that it will probably be pretty expensive to get an answer from a tax lawyer, and you will still not get a bright-line answer. If the amounts involved are high enough, it can still make sense to get this advice (for example, to help avoid penalties if the IRS ultimately disagrees with you). There is relevant case law and under the common law rules that existed before the statutory wash sale rules were enacted, as well as legislative history of the wash sale rules, that can help guide this decision, but a lot is left up to judgment.

In response to the question about identifying lots, see questions 40 and 41 here.
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ras4250
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Re: Tax Loss Harvesting and Cryptocurrency

Post by ras4250 »

HootingSloth wrote: Wed Jun 16, 2021 11:50 am In response to the question about identifying lots, see questions 40 and 41 here.
Many thanks that was super helpful and actually answers the question. Also question 39 I thought addressed it as well. Quoted below:

Q39. I own multiple units of one kind of virtual currency, some of which were acquired at different times and have different basis amounts. If I sell, exchange, or otherwise dispose of some units of that virtual currency, can I choose which units are deemed sold, exchanged, or otherwise disposed of?

A39. Yes. You may choose which units of virtual currency are deemed to be sold, exchanged, or otherwise disposed of if you can specifically identify which unit or units of virtual currency are involved in the transaction and substantiate your basis in those units.

As long as you keep the private key address (or some identifier) or keep a detailed listing of all lots/transactions, you can decide which lots are bought or sold and the resulting gain/loss.

Thank you!
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