The Light at the End of the Crypto Crash
This article is for you if…
- … parts of your Crypto portfolio now are worth less than they were a year ago
- … you bought Cryptocurrencies within the past 12 months
- … you are dreading your tax returns
- … you are looking for ways to save money
The Sky was the Limit
Do you remember December of 2017? It was the moon landing of the crypto space. It was the season of Blockchains, ICOs, Pre-Sales, and even your dog was starting his own Crypto Investment Fund.
No Time Like the Present
Unfortunately, just as Neil Armstrong didn’t stay on the moon, cryptocurrencies came back down to earth. Hard. Nvidia is down almost 50% and Lamborghinis are collecting dust at the dealerships.
And instead of Bitcoin prices of close to 20k, we are now down to a measly 3–4k.
You don’t dare to even think about the money you could have made. But you are also less stressed out. You don’t check CoinMarketCap as much.
But deep down, you know (or at least you hope) that better times are coming. So you don’t sell what you have. Every behavioral economics bias prevents you from it. Crypto is your personal Stockholm syndrome, you are a walking mental accounting case study.
You’ve got to Realize what you Lost!
Realize your Losses!
I know it hurts. But please, hear me out!
There might be something to ease the pain. Something that at least gives you a little redemption. The magic word (or words) is realized losses.
You bought 1 bitcoin all the way back in 2015 when Bitcoin was still cheap at $200. You are quite happy with your returns, even now, as you’ve made about gazillion percent on your initial investment of $200. And the best part — it was all 100% tax-free! Holding periods rule! (If you’re wondering how that can be, check out our article about holding periods here).
But because you were young and free and an optimist, you expanded your portfolio with another Bitcoin at 7k sometime in August last year. “Buy the dip”, they said.
Have you considered that you’ve actually lost a good bit of money on your second investment? What a stupid question… Of course, you have! You’ve watched in agony as the price went lower and lower.
Due to the way inventory is counted, you can actually realize a loss of about $3,500 if you sell your second Bitcoin within your holding period!
That means that you can carry forward a loss of $3,500 to next year when prices are hopefully going up again! At a tax rate of 25%, this is significant dough — $875 of savings — just for you.
Money for nothing? Too good to be true?
There is no such thing as free lunches.
But I’m sure you would agree that calling the crypto-crash of 2018 “free” isn’t just a bit of an overstatement, it’s outright mean…
So what do you have to do?
You need to sell the Bitcoin that you bought last year. The expensive one.
How do you separate the cheap from the expensive?
This is where it gets a tiny little bit complicated. Due to inventory methods that are generally used in this situation, your investment accounting will follow “FIFO” — meaning first in — first out, so if you just have one wallet with all of your Bitcoin and you sell one, your tax authority will assume that you have sold the Bitcoin you bought first — and due to holding periods won’t charge any taxes.
However, if you hold your earlier Bitcoin in a different wallet (i.e. by transferring it there), and you sell the crypto remaining in that original wallet, you are selling the more expensive one and thus, the FIFO method can save you real cash.
Holding your currencies in multiple depots that way can give you a better tax break than Amazon got during the hunt for HQ2.
Is This Legal?
The definitive and clear answer is “Probably!”
The law is still a little fuzzy on saving taxes just for the sake of saving taxes. However, it does allow tax optimization. Where one ends and the other begins is not always clear, so make sure to speak to a certified expert before attempting this method.
Disclaimer: This article about taxation of cryptocurrencies contains an opinion on generally worded taxation principles. They are explicitly not tax advice. As of yet, the taxation regulation is not completely unambiguous for crypto taxation. This article is not made to answer questions geared towards taxation and cannot replace an individual consultation with an accountant, attorney or bookkeeper.
Please ask your accountant before declaring your taxes.