As Bitcoin goes mainstream, the wealth management industry is starting to integrate cryptocurrencies into investment portfolios. Who wouldn’t want exposure to an asset that’s increased 2,000% in value since December 2020?
The problem with Bitcoin for many investors is that while yes, it goes up, it could just as quickly fall down. Bitcoin lost 50% of its peak value in July before slowly crawling back up, still stubbornly remaining below its April all-time high of $64,863.
But what if there was a way for Bitcoin to be beneficial whether an investor gained or lost?
That’s exactly what some advisors are pitching to their clients, according to the WSJ.
Here’s how it works: Investors buy cryptos through their broker, and either the client or the broker can set the accounts to sell their cryptos once their value falls by a certain amount, which generates taxable losses. If investors have made gains in other areas of their portfolios, they can offset those with their crypto losses. Those same accounts soon after buy the coins back for the same or even a lesser price.
For those familiar with trading, this strategy might ring some alarm bells because of the “wash sale” rules which prevent investors from claiming capital loss deductions if investors repurchase an asset within 30 days of selling it for a loss. These rules apply to stocks, bonds, options, and other securities. Cryptocurrencies, however, are technically considered property by the IRS, and they don’t have to abide by the same rules as securities, at least for now.
The House Ways and Means Committee approved a proposal that would change cryptos from property to securities. The proposal sits within the package of proposed tax increases aimed to fund the massive infrastructure budget still being negotiated. If the bill passes with the proposal still intact, cryptos could start counting as securities fairly quickly — on January 1st, 2022, to be exact.
For the meantime, though, cryptocurrency’s tax loss harvesting work-around is making investors quite a bit of money.
For example, Michael Durso, co-founder of ShoreHaven Wealth Partners, told the WSJ that one of his clients bought $100,000 worth of bitcoin and ether and set the account to harvest losses when either coin lost 5% or more. The client has since accumulated $30,000 in losses that he can use to offset large gains from other investments, while still gaining 10% on his cryptocurrencies investments.
While advisors currently utilizing this tax harvesting strategy expect crypto’s new security classification to impact inflows to the accounts they manage, they are not worried that clients will suddenly become disinterested in cryptos entirely.
“The tax optimization might go away. It most likely will,” said Ahmie Haum, who runs wealth-management firm Interchange Capital Partners, “but a decent amount of people will still want to own cryptocurrencies.”
For more news, information, and strategy, visit the Crypto Channel.