- Bitcoin ends the year in free fall, but investors could benefit from the price drop.
- The wash sell rule that applies to most securities does not apply to cryptocurrencies.
- Crypto traders can sell at a loss to offset capital gains taxes and buy back at the same price.
Bitcoin ends the year with a 32% drop from its all-time high in November of around $ 68,000. On Friday, the crypto was trading at around $ 46,000.
Many investors were bracing for a year-end parabolic bull run that would see bitcoin reach highs of up to $ 100,000. But that wait has now been pushed back to 2022. But investors can take advantage of a tax loophole while waiting for cryptocurrency to return.
The popular consensus of technical analysts like Scott Melker, host of the “Wolf Of All Streets” podcast, and Carl Runefelt, a crypto investor and influencer, suggests that the price of bitcoin should consolidate sideways for a few months, hovering around 40,000. $ to $ 50,000.
Runefelt previously told Insider that the huge correction seen in the price of bitcoin means buyers need time to regain momentum.
But once bitcoin is able to regularly break above $ 53,000, it could grow to six digits and even hit a price of $ 300,000 in 2022, Runefelt told Insider.
Until then, investors who took a hit could use it as a tax break. In fgeneral,
losses can offset taxes held on gains.
One of the advantages of crypto over stocks is that the wash sell rule does not apply to it. A wash sale is when a security is sold at a loss and bought back soon after. When this is done with securities, losses incurred are not deductible.
Some seasoned crypto traders purposely sell their digital assets below the purchase price and then buy them back at the same or similar price to take advantage of this tax-loss harvest rule.
Since cryptocurrencies are generally viewed as property rather than security, this tax loophole is available. However, future regulations could put an end to it.
The sale technically triggers a capital loss. But as the investor re-enters the position at a similar price, he is still in the game waiting for the next rally. For this to be successful, an investor must be convinced that the price of crypto will rise in the future.
Although crypto is very volatile, large cap coins such as bitcoin and ethereum have continued to rise over time, regardless of the magnitude of the drops. Although the same may not be true for riskier small cap cryptos.