Over the years, the stock market has established its prevalence in the finance world. Now, an emerging new market, the cryptocurrency field is gaining prominence. Though there are numerous similarities between these two financial markets, there are some differences too. While stock investment is institutionalized and is quite common now, the digital currency market has yet to reach this stage. It still encounters a healthy dose of skepticism.
There is one particular factor that is often overlooked or ignored. It is the impact of taxes on the capital gains or losses of the investments. Be it a cryptocurrency like Bitcoin or stocks – tax efficiency is a crucial factor. If you want to be an accomplished trader, you must take into account this parameter as well.
Capital gains
From the tax perspective, capital gains in both Bitcoins and stocks have no differences. According to IRS Notice 2014-21, virtual currencies are given status as “properties”. However, the taxes for capital gains are the same for various financial securities that include stocks, Bitcoins, etc.
Capital losses
While capital gains do not offer any advantage to Bitcoin investors, the capital loss does. It might come as a surprise, but digital currencies such as Bitcoin provide better tax loss harvesting when compared to other securities. If you get more information than visit Yuan Pay Group.
To understand how the crypto investment is better for tax loss harvesting, you must first know about it. Tax loss harvesting is basically the strategy, when you sell off assets, which have a lower value than the current market price. It is to reduce the capital gains and thereby save money in the form of taxes. With tax losses, you can now decrease the overall tax payment.
In turn, you can then use the money saved to reinvest and enhance your investment portfolio. However, stocks face a plethora of restrictions that can interfere with frequent tax loss harvesting. The more you can save the tax amount, the more money you can put back into the investment.
One of the major aspects that provide Bitcoin an advantage over the traditional stocks is the implementation of the wash sale rule. As per IRS, the wash sale rule prohibits the purchase of stock or security sold within 30 days. It means that you cannot repurchase your assets or similar assets immediately. The law is in effect to block taxpayers from declaring losses on their securities in order to get the maximum benefit of the tax loss.
However, without clear clarification of the IRS, the status of cryptocurrencies is not explicit. There is no clear information that suggests that the 30-day rule is applicable for digital currencies or not. Moreover, more information about what virtual currencies can be considered as similar is needed.
The working of the tax loss harvesting for cryptocurrencies
It is vital to keep in mind that digital currencies are considered capital assets. An unrealized loss is a major issue when it comes to crypto trading. You could be sitting with bitcoins in loss and unable to realize its effect on the tax payments.
Tax loss harvesting involves the strategic play to sell assets when you are holding them at loss. Harvesting these losses can deduct from the total tax liability.
For instance, you have capital gains of $7,500 at the end of the tax year. However, you also possess some Bitcoins that are worth$5,000 but at losses.
Now, if you do not sell off these Bitcoins, you will have to pay the tax on the total capital gain of $7,500. However, if you make the move of tax loss harvesting and sell the Bitcoins, you can claim $5,000 in losses. Moreover, now your overall capital gains are $2,500. Can you now understand how harvesting can reduce the overall tax payment?
How to harvest the tax losses for cryptocurrencies?
Harvesting the tax losses for the cryptocurrency is not extremely simple. You will need to dedicate a substantial amount of time to researching the intimate details of this procedure. Moreover, if you have multiple types of digital currencies, you will have to consider various aspects. Some of them include holding time period, cost base, etc.
In an effort to give you an idea about this procedure, we have compiled a series of steps that is crucial for tax loss harvesting.
- Step 1: You must identify the unrealized cryptocurrency losses that you have. It is an imperative step and will help you save a lot of money.
- Step 2: Then, you must sell that unrealized loss completely.
- Step 3: Now, you must again repurchase the assets or something similar in amount. It will help you to maintain your portfolio composition. However, make sure that these transactions are done by the end of the tax year.
- Step 4: Now, you must transfer the crypto coins to the wallets again for long-term holding.
A word of caution!
Right now, the guidelines for cryptocurrencies regarding tax loss harvesting is murky at best. The argument that Bitcoin is considered as a property, and thus does not have the same restrictions as that of other financial securities such as stocks is valid.
However, there is no such guideline, which explicitly explains the wash sale rule for cryptocurrencies like Bitcoin. Moreover, abusive practices can lead to the disallowance of losses. And as such, you must be careful while using such means to harvest tax losses from Bitcoins.
Final words
Both the cryptocurrency and the stock market offer a wide range of investment opportunities. You just need to study the market and opt for the best possible strategy. However, the tax impact on Bitcoin and Stocks is something that you must consider. When the market is down, and you are suffering capital losses, you can implement the tax loss harvesting procedure.
While both Bitcoin and stocks offer advantages, it is Bitcoin that has an edge over the latter in this aspect. It is mainly due to the fact that cryptocurrencies are actually still exempt from the wash sale rule. However, it is also to be noted that you must exercise caution while dealing with these unclear legalities.
