Submitted by tacticalsauce_actual t3_zzh2za in personalfinance
I suffered 15k in losses roughly this year.
I am debating selling everything then buying it all back. I have no interest in rebalancing the crypto portion of my portfolio. I would just buy the same things again 30 seconds after selling it all.
It would cost me about $800 in fees to sell and buy everything back.
Is this worth it? I have no gains through the year to offset, but would it protect my potential gains from next year?
Successful-Driver722 t1_j2ccl4e wrote
>US Crypto Wash Sale Rule
>
>The IRS does have a wash sale rule. The US wash sale rule occurs when an individual investor sells or trades an asset at a loss and buys back a "substantially identical" asset within 30 days. If an investor does this - they cannot claim a capital loss.However, the US wash sale rule currently only applies to assets that are classified as securities - like stocks, bonds and other financial instruments. Cryptocurrency isn’t classified as this by the IRS, it’s classified as property.So right now, the IRS wash sale rule doesn’t apply to crypto. This said - the wash sale rule will apply to crypto related securities like stocks in exchanges.Before you rejoice - this is very likely to change in the near future. US congress are currently reviewing the tax treatment of crypto to tighten up loopholes like these.
However, you should keep the following in mind:
>The Economic Substance Doctrine
>
>The economic substance doctrine is a common law rule that unwinds actions taken by a taxpayer despite the taxpayer meeting all of the requirements of the IRC if the taxpayer cannot show the transaction has economic substance or a business purpose. The common law doctrine was codified in 2010 with the addition of IRC section 7701(o). However, the Code provision makes clear that the determination of whether the economic substance doctrine is relevant to a transaction shall be determined based on the judicial history of the common law rule and as if IRC section 7701(o) was never enacted.
>
>There are two prongs to an economic substance doctrine analysis. The first prong inquires as to whether the transaction being entered into changes in a meaningful way the taxpayer’s economic position (commonly referred to as the objective prong of the doctrine). The second prong inquires whether the taxpayer had a subjective non-tax purpose for entering into the transaction (commonly referred to as the subjective prong of the doctrine). At its core, the doctrine is trying to ensure a taxpayer entered into a transaction for a reason other than solely reducing tax liability and that its effect on the taxpayer includes something other than the mere tax effect.
>
>There is currently a Circuit split between the DC and Sixth Circuit and the Third and Fifth Circuit on when the economic substance doctrine should apply. The DC and Sixth Circuit limit the use of the economic substance doctrine to situations where the tax provisions in question are open to debate or the text of the tax provisions in question reference economic substance. The Third and Fifth Circuit have applied the doctrine broadly allowing a court to unwind transactions even when a taxpayer followed the clear and unambiguous guidelines laid out in the Code provisions so long as the individual falls short on either of the two prongs of the doctrine.
>
>IRC section 1211, the Code provision that allows for the harvesting of a tax loss, is short, clear, and does not reference the need for economic substance. Furthermore, our research did not find a single case applying the economic substance doctrine to IRC section 1211 (undoubtedly this is partially due to the wash sale rule). In almost all of the cases in which the economic substance doctrine has been applied elaborate schemes were devised by the individuals and corporations involved and the amount of money involved was substantial. Therefore, we believe it is highly unlikely that the IRS would apply the doctrine to an individual who harvests a tax loss from the crypto market correction. However, it is easy to envision scenarios where a nefarious taxpayer created an elaborate scheme to benefit from IRC section 1211. In that case, we would not be surprised to see the IRS take action under the economic substance doctrine.
>
>Conclusion
>
>An individual is clearly allowed to harvest a tax loss based on IRC section 1211. How the individual can redeploy the harvested losses back into the ecosystem is far from clear. Based on a strict interpretation of the Code, an individual could redeploy the harvested loss directly back into the same crypto asset. However, an individual invoking this strategy could have his/her loss unwound by the economic substance doctrine. If an individual wishes to be safe while harvesting his/her crypto loss, the individual could follow the guidance of the well-established wash sale rule. In between those two scenarios is a murky area of the tax law. The more nefarious and elaborate the scheme to harvest the tax loss, the more likely the IRS is to unwind the transaction.
​
US Crypto Wash Sale Rule - https://koinly.io/blog/crypto-tax-loss-harvesting/
The Economic Substance Doctrine - https://cryptoustaxattorneys.com/redeploying-crypto-harvested-losses-the-wash-sale-rules-and-the-economic-substance-doctrine/
The above is never financial or taxation advice.
Always do your own research!
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