If you go back to 2013, the market cap for bitcoin was a little over $1 billion. Later on, this number would explode more than 1000-fold to a value of more than $1.2 trillion! However, the market cap as of January 2023 is closer to $300 billion.These are the kinds of huge swings up and down that the world of cryptocurrency is famous for. These swings are also one of the reasons why so many people are interested in crypto tax-loss harvesting.
The bigger the dips in the market, the bigger the opportunity to enjoy huge benefits through this strategy for lowering your overall tax liability. So what is bitcoin tax-loss harvesting, and what are the benefits that it provides? Read on to learn all about this tax strategy and how it works!
Cryptocurrency gains are classified as capital gains. When someone’s investments increase in value, they will often need to pay some percentage of those gains as part of their tax liability. However, you can sometimes avoid paying some of these taxes if you suffer capital losses.
Capital losses occur when someone makes an investment that goes down in value instead of up. Of course, if someone’s investment goes down in value, there is no gain to be taxed. However, what happens if someone invests in two things at the same time and one goes up and the other goes down in value?
In this case, you can add the capital gains and losses together. If the overall losses are bigger, then it is not necessary to pay taxes even on the one investment that went up in value.
If the capital gains are larger, then it will be necessary to pay capital gains taxes on them. However, you will only pay taxes on the portion of the gains that exceed the magnitude of the capital losses.
In other words, the bigger your losses in one area, the more you can use them to offset your gains in another area.
For this reason, people sometimes make a point of incurring strategic capital losses so that they can offset their capital gains and pay fewer taxes. This is the essential bitcoin tax-loss harvesting strategy, one of the more powerful advanced strategies for investing in crypto.
Someone who has capital gains in another area can sell off their cryptocurrency at a losing price. That will offset their capital gains and decrease their tax liability.
In fact, if an investor is lucky, they can do all of this and then buy their recently sold investment back again. If the cryptocurrency price has not shifted, then this allows people to lower their tax liability without any real negative side effects from selling an investment at a loss.
Based on this understanding, one of the requirements for this strategy should be clear. There is no point in using this strategy if you do not have some capital gains to offset.
On top of that, if you already have capital losses equal to or greater than your capital gains, there is also no point in using this strategy. But if your capital gains exceed your capital losses, this might be the perfect opportunity for you to apply this strategy.
However, many people who use strategies like this use them at the end of the tax year. After all, if you wait until the tax year has ended to sell some of your investments at a loss, then you cannot use those capital losses to offset your capital gains from the previous tax year.
There is another situation in which it may make sense to employ this strategy. If there is a large dip in the value of cryptocurrency, then you can incur an unusually large loss by selling during that dip. Some people take advantage of market dips to incur larger capital losses.
There is no limit to using this strategy to offset your capital gains. However, you may also be able to deduct as much as $3,000 each year from your regular income by incurring capital losses. Once you have hit that limit, there is no point in continuing this strategy for purposes of offsetting your income.
You may also want to keep in mind that if you have excess losses, you can carry them into the future to offset future capital gains and income. This is another reason why so many people prefer to incur capital losses during market dips.
If the tax year ends and you do not have any capital gains or income to offset, that does not mean that your capital losses are wasted. You can come back to them in the future to lower your tax liability.
This tax savings strategy may not always be available in the same way. Currently, you can sell an investment and then buy it right back again after decreasing your tax liability.
However, this is not legal when it comes to securities. Some people consider that this same law should apply to cryptocurrency. There is a decent chance that future lawmakers will agree.
Many people hear about Bitcoin tax-loss harvesting and assume that it is a complicated process. Although there is some truth to this, enjoying the benefits of this tax strategy can be much easier than some people might imagine. Depending on the situation, using this strategy can provide incredible value by lowering someone’s tax liability for years.
To learn more about how to take care of your financial health and future, reach out and get in touch with us here at any time!
Understanding DCA as it relates to Bitcoin. There are certainly some flashy, eye-catching methods of investing in bitcoin. Unfortunately, they seldom offer the rewards they promise.
You may have experienced disappointment after disappointment with these techniques. Now you’re looking for something that doesn’t overstate its potential but delivers consistent, reliable results.
What you’re looking for is dollar cost averaging or DCA. When you DCA bitcoin, you gain valuable benefits both financially and otherwise.
We’ll share seven impressive reasons investors say they found what they were looking for in DCA. Bitcoin Savings Account: 5 Important Things to Know
DCA or dollar cost averaging is an incremental approach to investing regardless of market conditions. In its most basic form, it means purchasing bitcoin at regular intervals, such as weekly, on an ongoing basis. You can easily automate the process, so you don’t have to remember to make your next purchase.
Now let’s look at DCA’s potential benefits.
Timing the market is tempting to most new investors. On the surface, it seems simple. You watch the market until prices dip significantly and buy. Next, wait until prices rise as high as they can and sell before prices start heading downward.
One of the many problems with trying to time the market is you have to be right when most other investors are wrong. That would be a challenge for even the most brilliant, well-educated investor.
You are also putting yourself in a position where you must be right not just once but twice. You have to correctly predict the bottom of the market as well as its top.
Conversely, you’re not worried about being “right” or “wrong” with DCA. You’re looking down the road.
So, how effective is the approach? Let’s look at what would have happened if you had purchased $20 of bitcoin weekly beginning on the first day of 2014 and continued until November 8, 2022.
According to a bitcoin DCA calculator, you would have converted a $9,220 investment into $160,877.02. That’s an increase of over 1,645%.
Decision fatigue is the mental state after a person is overwhelmed for an extended period with choices to make. You may have experienced this if you’ve ever had to plan a wedding or remodel a house. The decisions can seem fun initially but become increasingly burdensome as the process drags on.
That’s why you’ve heard the oft-repeated story of people in power, such as CEOs and even the President of the United States, limiting their daily wardrobe. In the mornings, they don’t face a multitude of choices for clothing. Those who have adopted this approach say that it saves them valuable mental energy.
Dollar cost averaging your bitcoin likewise saves your brain from the exertion of having to make daily buy and sell decisions. You only need to establish your investment amount and the frequency with which you’ll invest. That’s it. You’re done.
You may be a person who believes it’s not necessary to set up a budget. Perhaps, you never experience a financial shortfall at the end of the month. That’s great. But there are other reasons why a budget is still valuable.
A budget helps you set priorities. Without one, you might find other ways of spending your money. But if you use a budget, you will mentally set aside a certain amount to buy bitcoin.
This leaves you and your wallet free. You can concentrate on pastimes, hobbies, and other activities.
Any asset can be the subject of the great hype machine, but bitcoin is a favorite target. Try browsing bitcoin newsletters, blogs, and podcasts without being told you’re in danger of missing out on the next big thing.
No one’s surprised when a small child is distracted by shiny things, but we’re disappointed when supposedly mature people are. You can avoid disappointing yourself by using DCA.
You would no longer have to scrutinize each new offering for fear of missing out. Jumping from one investment strategy to another is a sure way of losing momentum. As the old saying goes, the person who chases two rabbits seldom catches either.
Market volatility frightens newcomers and even some longtime investors. Why? There’s a dread of losing money if the market tanks shortly after you enter it.
That fear is understandable for a new investor looking for somewhere to put a small inheritance. You don’t want to wake up and learn that you lost 50% of your investment overnight.
On the other hand, using DCA to invest a reasonable percentage of income regularly reduces risk. How?
You know that you’re not reliant upon the results of a one-time investment. You’re in the market for the long term.
Therefore, if your assets take a hit, you’re sure of two things: 1. history tells you the setback is only temporary, and the market will rebound, and 2. now that prices are lower, you’re going to purchase more bitcoin at a bargain as part of your regular investment routine.
One of the reasons bitcoin trading can be obsessive is its availability. There is no off time. The market is constantly changing, which is an enticement to someone whose brain is geared toward finding excitement and novelty.
Seeing what a traitor thinks are signs of a bull run can release dopamine, a brain drug of anticipation and reward. The sensation can train the brain to chase that high over and over. Progressively, the anticipation and the reward have to become greater. That usually means risking more money.
Like any addiction, bitcoin obsession can lead to financial ruin. More importantly, it can endanger families and other relationships. Even your physical health is involved.
DCA can reduce the likelihood of your heading down the path of addiction because it doesn’t matter what the market is doing at three in the morning, during your best friend’s wedding, or during your grandfather’s funeral service.
Your Investments are on a set schedule, leaving you free to focus on the more important moments of life.
Even the most hardcore bitcoin investor will likely have a well-rounded portfolio that includes other assets. However, spending all day every day concentrating on buying bitcoin leaves little room in your schedule for researching other investment opportunities.
DCA gives you that time back. Now you can delve into other avenues that require learning about promising assets with which you need to become more familiar.
Are you interested in getting off the never-stopping treadmill of timing the market? If so, you can DCA bitcoin to find the same comfort and peace of mind it’s given other investors.
Contact us today for more information about how you can get started with dollar cost averaging.
First Financial® | Corporate Headquarters | Mailing Address: First Financial 8880 Rio San Diego Dr. 8th Floor #2011 San Diego, CA 92108
Client Service Center: Main: 1-800-315-7791 Fax: 1-800-215-0217
First Financial® & First Financial Online® are Federally Registered Trademarks
©1996-2024 First Financial®, All Rights Reserved. All other products and company names are trademarks of their respective companies. First Financial® does not provide any investment, financial, tax, legal or other professional advice. We recommend that you consult with financial and tax advisors to understand the risks and consequences of buying, selling and holding Bitcoin.*Not all lenders can provide up to $5,000.
