4 year-end moves to slash your cryptocurrency tax bill

As the end of the year approaches, there are still ways to reduce cryptocurrency tax bills, financial experts say.

The IRS generally defines cryptocurrency as property for tax purposes, and investors must pay levies on the difference between the purchase and sales price. 

If there’s a profit on assets held for less than one year, it’s a short-term gain, subject to regular marginal tax rates from 10% to 37% for 2021.

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And currency owned for more than one year may qualify for lower long-term capital gains rates of 0%, 15% or 20%, depending on income. 

While buying currency isn’t a taxable event, someone may owe levies by converting it to cash or another coin, using it to pay for goods and services, receiving payment for work and more.

1. Tracking gains

2. Wash-sale loophole

If someone expects taxable gains for 2021, they may take advantage of a loophole allowing them to offset some profits with losses

Currently, digital assets are not subject to the so-called “wash-sale rule,” stopping someone from selling a losing investment to write-off the loss against other gains and keeping their exposure by rebuying a “substantially identical” asset within 30 days.  

“If the market is down, it’s a good time to harvest those losses,” Chandrasekera said, and some investors have already been watching for opportunities.

For example, if someone bought bitcoin at $60,000, they may take advantage of the loophole by selling if it drops to $50,000, use the $10,000 loss to offset other gains, and repurchase the asset shortly after.

“You can sell losing positions now and buy them right back in three seconds,” Markowitz added.

However, House Democrats want to close this loophole after Dec. 31, 2021, requiring digital currency to follow the same wash-sale guidelines as stocks, bonds and other securities. 

And if someone wants to diversify their regular taxable portfolio, they may use the current crypto wash-sale loophole for the same purpose.

“Maybe you take more [cryptocurrency] losses this year and get back into the market,” said Dan Herron, a San Luis Obispo, California-based certified financial planner and CPA with Elemental Wealth Advisors. “You can use that to your fullest advantage right now.”

3. Leverage lower brackets

Someone under the threshold may also sell cryptocurrency at a profit, pay no long-term capital gains and rebuy the asset for a so-called “step-up in basis,” which adjusts the purchase price to the current value for a lower tax bill in the future.

“I think that is probably an underused strategy,” Markowitz said.

4. Professional guidance