This rarely used tax loophole is helping some bitcoin holders lower their tax bill

Thanks to a quirk in the tax code, holders of the digital currency can shield their winnings from the IRS, which is a good side effect of the 36% drop in price.

The IRS considers cryptocurrencies like property, meaning that if you spend, exchange, or sell your token, you are logging a taxable event. The cost basis and market value are the two main variables that affect how much you pay for your coin. Capital gains taxes can be triggered by that difference.

The accounting method known as HIFO can slash an investor's tax obligation.

You can choose the unit you are selling when you sell yourcryptocurrencies. That means that a holder can use the most expensive number to determine their tax obligation. A higher cost basis means less tax on your sale.

The onus is on the user to keep track. The IRS can't be substantiated without detailed records of a taxpayer's transaction and cost basis.

Shehan Chandrasekera, a CPA and head of tax strategy at coin tracker.io, said that people rarely use it because it requires keeping good records. This kind of accounting is very easy because lots of people now use that kind of software. They don't know it exists.

Keeping detailed information about every transaction you make for each coin you own is the trick to HIFO accounting.

If you don't have all transaction records log, or you don't use the right kind of software, the accounting method defaults to something called a first in, first out.

Chandrasekera says it is not ideal.

When you sell your token, you are selling the earliest coin. Your low cost basis can mean a bigger capital gains tax bill if you bought before the big price run-up.

The wash sale rule has the potential to save taxpayers even more money, according to experts.

According to Onramp Invest CEO Tyrone Ross, losses on digital currency holdings are treated differently than losses on stocks and mutual funds. The wash sale rules don't apply, meaning that you can sell your bitcoins and buy them back at a later date.

Aggressive tax-loss harvesting, where investors sell at a loss and buy back at a lower price, is a result of this nuance in the tax code. You can use those losses to lower your tax bill.

A taxpayer can buy one bitcoin for $10,000 and sell it for $50,000. The individual would face capital gains taxes. If this taxpayer had previously lost $40,000 on earlier transactions, they would be able to offset the tax they owe.

Chandrasekera explained that he wanted to look as poor as possible.

He says he sees people doing this on a weekly basis.

Buying back theCryptocurrencies is a key part of the equation. If the price of the digital coin goes up, investors will be able to catch the ride back up.