Year-End Tax Planning – Time to Revisit Crypto Investment Strategies

Over the last few weeks, the initials “SBF” have dominated the internet and news cycles, causing countless investors, including celebrities, significant heartache. And Samuel Bankman-Fried (aka SBF), the founder and former CEO of cryptocurrency exchange FTX and Alameda Research, a cryptocurrency trading firm, has become the poster child for high-risk crypto investing.  

Sports figures, including Tom Brady, Steph Curry, and Shaquille O’Neal, who supported and backed FTX, are now in regulators’ sights after FTX declared bankruptcy. Actor and comedian Larry David starred in a Superbowl commercial suggesting, sarcastically, that he “didn’t think the platform would be successful” at a time of high-flying expectations around FTX due to its ease of execution. The investors who lost billions are suing SBF and others who allegedly used deceptive practices to sell the FTX cryptocurrency account and platform. No matter the outcome, it is clear that investors lost significant money, and litigation may take years to resolve. This scenario reminded us of our earlier article outlining the tax implications of investing in cryptocurrency and potential casualty loss, theft loss, and investment loss.

The original article discussed that taxpayers could incur three types of losses with cryptocurrency investment. Internal Revenue Service (IRS) believes that cryptocurrency is treated as property according to Notice 2014-21. The article concluded that the IRS would limit taxpayers’ losses to $3,000 per taxpayer ($1,500 if filing separately from an investment relating to the sale or exchange of cryptocurrency. With year-end tax planning in full swing, it’s a good time to revisit tax loss harvesting and understand the applicability of wash sale rules to help better position your portfolio and tax posture.

Tax Loss Harvesting

Reviewing one’s brokerage accounts, especially as we end the year, can serve as a medium to help minimize your tax bill. A diversified portfolio of various asset classes is the benchmark most portfolio managers utilize for their clients. When it comes to tax implications, understanding how your portfolio is doing can impact decision-making and prevent a potential tax liability.

Tax loss harvesting incorporates selling profitable stocks at a gain (rebalancing /realigning your portfolio) complemented with selling stocks at a loss to offset that gain liability. The strategy can be beneficial in saving taxpayers’ dollars even with the caps on losses referenced above. It’s important to note, however, that tax loss harvesting will not work with retirement accounts such as a 401(k) or an IRA, and a taxpayer must also understand the wash sale rules.

Wash Sale Rules

Under IRC 1091, a taxpayer may not take a loss deduction for securities sold at a loss and, within 30 days before or after the sale, buys the same or substantially identical stock or security. The law intends to prevent taxpayers from benefiting from a tax deduction while maintaining their position in the same protection. The IRS believes this is an “artificial loss” by a taxpayer trying to take advantage; thus, within the “61 day period,” the loss would be disallowed. Under the rule, the loss is not forfeited but added to the basis of the future purchased stock or security. Under Revenue Ruling 2008-5, wash sale rules also apply to traditional and Roth IRAs.

Wash Sale Rules / Tax Harvesting Losses and Interplay with Crypto

Unfortunately, with losses limited to $3,000 for taxpayers ($1,500 for married filing separate individuals) and wash sales potentially limiting the losses, taxpayers can find themselves at the short end of the stick. However, some experts believe there is a reasonable position or argument that wash sale rules may not be applicable based on the current definition of virtual currency. If so, taxpayers could take a loss and buy back the same cryptocurrency immediately or shortly after that. Thus, taxpayers who incur significant losses in the crypto space could potentially offset capital gains from stock, securities, and crypto.

Under Notice 2014-21, cryptocurrency is treated as “property” and thus not considered a stock or security. The definition is important because the wash sale rules under IRC 1091 specifically focus on stock or securities and NOT property. Investors and taxpayers should discuss this potential tax savings opportunity with their tax advisors to understand the risks and possible penalties.

As the industry matures, we expect future guidance in this specific area. However, now is the time to work with your investment and tax advisors to formulate a holistic plan to achieve your financial/ retirement goals, along with proper tax planning to ensure savings and future growth. The Daszkal Bolton tax team and its fiduciary partners at Benchmark Financial are ready to help develop a plan that meets your needs and goals.


Adam Korenfield is a Tax Managing Director at Daszkal Bolton with 20+years of experience in federal, international, and state income tax compliance.

Adam Korenfield, CPA
Tax Director

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