A young woman walks past a window of a company that offers services for the internet of things.
The price plunge of the digital currency opens a tax loophole for investors.
The price of the coin fell to about $47,000 per coin. The decline was caused by the rise of U.S. Covid cases and other popular cryptocurrencies.
Stock, mutual fund, and other investors can not take advantage of that loss in a way that is possible with cryptocurrencies. The wash sale rules don't apply to the transactions.
This arrangement benefits both investors and investors.
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They can claim a tax benefit if they sell for a loss. Tax-loss harvesting allows investors to use a loss to reduce or eliminate capital-gains tax on winning investments. Second, investors can quickly buy back the coins they sold to capture any rebound in price.
The first benefit is available to everyone, but the second is not due to wash-sale rules. The anti-abuse rules prevent stock investors from buying similar securities within 30 days of a sale without triggering penalties.
Leon LaBrecque, a certified financial planner and accountant at the Sequoia Financial Group in Troy, Michigan, told CNBC that it allows you to manipulate the downside of the coin and use it to create a tax benefit.
Many people who invest in the digital currency may not have a loss on the books. The coin was up more than twice as much as the S&P 500 this year, despite the recent plunge.
The asset class escapes wash-sale rules by being treated as property by the IRS.
The dual benefit wouldn't apply to investors in securities related to cryptocurrencies.
LaBrecque said that you couldn't dodge the wash with crypto platform. You could dodge the wash with the coin.
The tax loophole may soon be closed by Congress.
The Build Back Better Act would impose wash-sale rules on transactions in cryptocurrencies. The legislation is stuck in the Senate because of objections from Sen. Joe Manchin, D-W.Va., a crucial swing vote.
The legislation may change during negotiations.
If investors are not careful, they may inadvertently run afoul of existing rules if they take advantage of the tax loophole.
Jeffrey Levine, chief planning officer at Buckingham Wealth Partners, told CNBC that investors risk the IRS labeling them "sham" transactions if they buy cryptocurrencies.
Levine said that the IRS wanted an investor to bear some economic risk for the sale.
The IRS will negating the tax benefit if investors hit the sell button and then buy back at a later date. The timing is not black and white.
Levine said that time is always your best argument. I think you have more flexibility with the fact that it is constantly trading.
He said a day is more than enough. I would be comfortable defending that to the IRS.
Even if the wash-sale rules are in place, investors can quickly establish positions in a different coin without getting tripped up.
Cryptocurrencies are different enough that they probably wouldn't violate the rules, according to the founder of Delancey Wealth Management.
The coins being exchanged on a blockchain have similarities, according to Johnson. The logic says that stocks traded on an exchange are not the same as those traded on the same exchange.
