Big loss in virtual currency? Here's how to get rid of itching

Big loss in virtual currency? Here's how to get rid of itching -  It has been a tough year for cryptocurrency investors who have seen the prices of digital assets plummet.

Bitcoin, for example, is trading about 65% down from its all-time high, a record just nine months ago.

If you bought it when crypto was on the rise and sold it this year, or if you're looking to sell it, there are at least a few ways you can make the pain of losing less painful.

Take advantage of losses

You can use your cryptocurrency capital losses to offset the capital gains realized this year. Even if it is through the sale of another security or another asset such as a stock or a house.

For example, in February 2021 he bought Bitcoin for $50,000 and recently sold it for $24,000. You hold the investment for at least a year, resulting in a long-term capital loss of $26,000.

Now suppose you sell your long-term holdings in a taxable brokerage account (that is, not a tax deferred account like a 401(k) or IRA) and reserve $10,000 in capital gains.

On your 2022 tax return, you can fully offset the taxes you owe on your $10,000 capital gain with a $10,000 capital loss. In addition, you can use your losses to offset taxes owed on up to $3,000 of your regular income for the year.

Losses not used this year can be used in the future. So in the above example, half of this year's capital loss ($13,000) is used to offset a capital gain of $10,000 and an income of $3,000. The remaining half of the loss can then be carried forward to future years. You can also use the $3,000 of your losses to offset taxes on your $3,000 of income, even if you have a year with no offsetting gains.

But when you die, your losses go away with you for tax purposes.You cannot bequeath them for others to use. "Your heirs don't inherit losses," said Larry Pong, a California-based CPA and CPA planner at CPA.

Wash sale rules don't apply to cryptocurrencies... yet

Unlike stocks, you can choose to sell your lost crypto assets and claim your tax losses, but you can buy the exact same assets again before and after the sale.

Here's why: For tax purposes, crypto assets are classified as property rather than securities. Capital losses from both types of assets can therefore be used to offset profits, but there are separate tax rules governing only securities and not crypto assets. At least not yet.

This is the so-called wash sale rule. The IRS does not allow capital losses claimed on the sale of stock or securities if the stock or a "substantially identical" stock is repurchased within 30 days before or after the sale.

There are no rules comparable to crypto. “Although the IRS has not specifically addressed this area, most practitioners believe that the wash sale rule does not generally apply to cryptocurrencies. The IRS has stated that it treats cryptocurrencies as assets. But the wash sale rule applies to stocks and securities," said Mark Luscomb, principal federal tax analyst at Walters Kluwer Tax & Accounting.

Therefore, even if you make a loss, you can always buy back if you are confident that the same cryptocurrency is guaranteed in the long run. It doesn't matter if it's the day you sell it.

“If you sell your cryptocurrency and buy it back quickly, you can tax the harvest loss without applying the 30-day rule,” said Kell Canty, CEO of crypto tax software provider Ledgible.

This trading advantage over securities will not last forever. Lawmakers have already proposed expanding the wash sale rule to cover cryptocurrencies and other assets in the proposed law. But that expansion is highly unlikely to happen this year.

“This rule may change in the future, but in 2022, crypto assets will not be subject to the wash sale rule,” Pong said.

One exception is when you have indirect exposure to crypto assets, such as through exchange-traded exchange-traded funds such as the ProShares Bitcoin ETF (BITO).

“Trading on a stock exchange may result in the IRS treating such cryptocurrencies as securities and subject to wash sale rules,” Luscombe said.