Managing Your crypto Assets During a Cryptocurrency Bear Market
To begin with a brief explanation, bear market implies when market prices fall below 20% thus encouraging selling of these shares for the obvious reasons of avoiding further losses some experts call it the financial winter. Most of the online community of crypto enthusiasts has gathered on different social forums to share their best ideas on what to do and how to surviving the crypto winter.
Traditionally, markets dint allows investors to play the wash-sale card this prevented investors from selling an investment for a loss and then quickly rebuying it. In the crypto market this rule doesn’t apply. Assuming an investor has lost money on a crypto position, there’s a unique opportunity to take advantage of these unrealized losses. Let’s walk through a scenario.
The wash-sale loophole and tax loss harvesting
Let’s assume an investor purchased $50,000 of bitcoin (BTC) and ether (ETH) in their crypto account and that the price of bitcoin was $55,000 per coin and ether was $3,500 per coin at the time of purchase. Assuming the investor split the funds evenly between bitcoin and ether at the time of purchase, he currently owns 0.45 BTC and 7.14 ETH. The investor held the coins through the bear market and still currently owns 0.45 BTC and 7.14 ETH. However, the current value of the position if bitcoin is trading at $29,000 and ether is trading at $1,900, is $26,616, an unrealized loss of $23,384.
In order to realize this loss, the investor can simply sell the crypto positions and the loss is realized. The -$23,384 loss can now be used to offset any taxable gains in other parts of the investor’s portfolio where he has profited. This is known as tax-loss harvesting.
In traditional financial markets an investor is forced to wait 30 days from the date of selling an asset in order to repurchase the same asset. If the investor does not wait 30 days, the transaction is considered a “wash sale” and the loss is not able to be used to offset a gain. So if you bought Tesla (TSLA) stock at $1,200 and sold it for $775 this year, you couldn’t rebuy Tesla stock for 30 days if you wanted to claim that loss of $425.
But this hasn’t (yet) been put into the tax code for cryptocurrency. So in the case above, if the investor still wishes to hold bitcoin and ether, he simply purchases the same amount of each immediately after selling the position. This does not create a wash sale, as it does in traditional financial securities. Jackson wood who is a portfolio manage at freedom day solution explains
Take this moment to hibernate till the storm is over
In as much as this may imply a weak economy and tough financial moment, on the flip side it may Be a calculated opportunity for a savvy investor to dive into the crypto’ market and make good money once the crypto’ market will stop gasping financially. However, as I sed on needs to be well informed before making this decision since cryptocurrency marker is highly volatile.
Alternatively, a savvy crypto’ investor may opt to liquidate their shares before Deeping further into losses that exceed their initial investment. All in all it will be a loss but not too much compared to if the loss would have eaten into their initial investment capital.
Use Dollar-Cost Averaging to Reduce Your Risk
NFT collector @Krissyos, on Twitter, offered tips for crypto and NFT investors in a 24-part thread. The first tip was to use dollar-cost-averaging (DCA) to restrict “your potential upside to mitigate possible losses.” By spacing out your investments, you don’t have to guess at finding the “dip” in your favorite crypto. “Look at your risk tolerance, then set up automatic triggers in your desired exchange accordingly,” @Kissyos tweeted.
Bobby Ong, co-founder of CoinGecko.com, agreed, “During bear markets, it’s very hard to time the pico bottom. If you don’t have any crypto exposure, start with BTC/ETH and dollar-cost your way in.”
Steer Clear of the Most Volatile Investments
“Once a widespread market downturn commences, the first step to take is to reevaluate current positions and reduce exposure to the most volatile assets,” CoinTelegraph.com advised.
Examine your crypto portfolio and look for projects that don’t seem to have staying power. These investments — from smaller alt-coins to NFTs — may not survive the winter. It’s not too late to cut your losses and minimize risk now.
Don’t Risk More Than You Can Afford to Lose
The old adage of never risking more than you can afford to lose holds more relevance than ever in a down market. Krissyos eloquently tweeted, “If you can’t sleep at night feeling safe with your current store of value, you won’t be able to make rational decisions.”
Crypto tax losses can offset more than crypto gains
According to Jackson wood, Another thing to note is that Losses realized in a crypto position can be used to offset tax liability on any gain realized, it does not have to be used against a crypto gain only.
It’s vital to note that taxation and crypto are a new frontier for many accountants and tax preparers. While the rules are clear, it’s incredibly important to track these transactions. If your crypto custodian does not generate a 1099 or if you self-custody your crypto, tracking your trades by hand or with the aid of crypto tax software is essential.
While we all wish crypto would simply rise in value forever, unfortunately that is not the case. Understanding the tax rules governing crypto positions can provide a unique opportunity during a bear market and can help ease taxable burdens of investors willing to do the work. While it is not guaranteed that this rule won’t change in the future, as of now this is a unique feature of crypto and should be used in financial planning.
Invest in Yourself
Well, this may sound like am asking you to give up on the market, but sometimes it is the right thing to especially if you feel you need more time to understand this volatile market. ideally this is the time to invest in learning more about crypto and NFT investing, experts say. Ong said he will use this time to find new projects that show promise. He tweeted, “If you are a long-term BTC/ETH holder, multi-year market gyrations won’t make any difference, so go spend quality time on yourself, family, and friends. Go for a jog, cycle, hike. Improve yourself technically and socially.”