The buying and selling of cryptocurrencies in the United States does not trigger a wash sale.
“The wash-sale rule is an Internal Revenue Service (IRS) regulation that prevents a taxpayer from taking a tax deduction for a loss on a security sold in a wash sale.
The rule defines a wash sale as one that occurs when an individual sells or trades a security at a loss and, within 30 days before or after this sale, buys the same or a substantially identical stock or security, or acquires a contract or option to do so.
A wash sale also results if an individual sells a security, and the individual’s spouse or a company controlled by the individual buys a substantially equivalent security during the 61-day wait period.
The point of the rule is to prevent investors from creating an investment loss for the benefit of a tax deduction while essentially maintaining their position in the security.”
Using this method resets the clock for long-term capital gains. This makes it a poor strategy for short-term traders looking to (legally) avoid taxes, but a viable one for longer term holders looking for relief.
Tax strategy is an important consideration, even when coins are down. This could be a smart time to lock in losses or start planning to restructure your portfolio. Remember, you can sell, lock in the write off, and buy right back in.
That’s one strategy.
What I want to talk about today is another strategy to legally avoid taxes, but it does not involve selling. It was wildly popular until recent events, and is one that has become taboo to discuss.
I dare breach the subject, with the disclaimer that it is risky and not for everyone, and something to likely consider further down the road when the space matures.
Crypto loans, if done right (key phrase), can still be a viable option to avoid taxes.
Taking a crypto loan does not require a phone call, bank visit, financial statement, credit check, or appointment. A bank can reject your loan for a myriad of reasons.
Crypto lenders don’t care what you plan to do with the money or your past history. All they need is your collateral to make the loan happen. They have the coins, you get the loan.
The most important consideration when shopping for a loan is the LTV ratio. The loan-to-value ratio represents the relationship between deposited collateral and the loan amount. It is a technical term across all lending markets. In our case, it refers to the ratio of crypto you put up for collateral vs. the value you receive back.
Since loans are no longer at peak popularity, the LTV terms could be more favorable to draw in business. As a standard in the crypto industry, you expect platforms to offer roughly a 50% LTV ratio.
Taking a loan comes with major risk. If you fail to pay back the loan in full or make all interest payments, you will have overpaid dramatically for the loan. Further, if the price of your collateral drops significantly, you will be at risk of a margin call and liquidation of assets. Remember, the game is designed for the house to always make a profit. They will not reach out to you and offer your money back. They will expect interest payments to be made.
That said, if the price moves in your favor, you are in good shape. It’s a delicate balancing act to attempt for those who want to avoid paying taxes.
The other obvious risk is the counter party - we have seen platforms explode, alongside the user assets being held there.
This is not something I am doing personally, or even considering. But it fits into the parameters of some people’s risk.
This process is still in its infancy and will likely be consumed by legacy banks in the future. In the next bull market, loans will likely look different but will still be a very popular crypto use case.
NOTE: I AM TRAVELING AND NOT TRACKING THE CHARTS, AS NOTHING HAS DRAMATICALLY CHANGED.