If you invest in stocks, securities or cryptocurrencies such a Bitcoin and Ethereum, this is an important video to watch. Many have made mistakes for not understanding what a wash sale is and when it is prohibited by the IRS.
You might not know this term. So I will explain what is use using a real stock.
Let say you bought 1000 shares Starbucks (SBUX) @ per share on December 13 2017 for ,000. On July 1, 2018, you see that the stock has dropped to per share. Meaning you had a loss of ,000. You have some other stocks that have done well, so you are looking for a way to lower your taxes. You think to yourself — hey you know what would be a good idea? Can you use your SBUX stock to realize a loss and then immediately buy it back to maintain my position? Sounds like a solid plan, right? Sounds like it should work. Can you think of any problems?
Well this is where having some knowledge of the tax code would really help. This is what is technically known as a “wash sale” Wash sales are prohibited by Section 1091 of the Internal Revenue Code.
Section 1091 states that your need a 30-day lag between selling and buying back otherwise, the loss that occurred will not be deductible. Now because it is a 30 day lag on both ends, you actually have to wait 61 days before buying a stock back in order to be able to claim your loss. Otherwise you will lose again. Once on the decrease in the value in stock and again, when the IRS won’t give you credit for the loss you actually suffered.
So can you use wash sales to utilize cryptocurrency losses?
Cryptocurrencies are bit volatile and because of this, many US taxpayers have large gains. But sometimes they are sitting on huge losses as well. The question is can you sell off the cryptos that have lost value to apply those losses against gains in order to lower your tax bill? And also, can you then immediately buy those cryptos back to maintain your market position? The answer is probably yes, section 1091 does NOT apply to cryptocurrencies.
Will the IRS change its mind?
Probably. There’s money to be had.
Of course, the IRS can always change this rule. Section 1091 does allow the IRS to expand the “stock or securities” that trigger the wash sale rule. If the IRS passes a regulation clarifying that Bitcoin and other cryptocurrencies do fall under the jurisdiction of Section 1091, wash sales may be disallowed. It’s safe to assume that the IRS will eventually take the step to disallow wash sales of virtual currency.
Personal property v. intangible property
Yet, its conceivable that the tax treatment for cryptocurrency can get worse. For example, one unfavorable outcomes would be that the IRS could make the decision to treat cryptocurrency as personal-use property as opposed to intangible property. Capital losses from the sale of personal–use property, such as your home or car, are not deductible. See IRS Publication 523.
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Can you use wash sales to offset cryptocurrency gains? Probably