But what happens if you sell a share of Apple at a loss, then rebuy it in the same day? In this case, it triggers an IRS regulation known as the wash-sale rule:
A capital loss will be disallowed when an individual sells or trades a stock at a loss and, within 30 days before or after this sale, buys a “substantially identical” stock.
Why would they not allow the loss? Because you would be able to perpetually capture capital losses to reduce your taxes, and indefinitely defer tax liability on the gain.
As an example, let’s say you purchase a share of Apple stock at $140, and suddenly the price drops to $100. Without the wash-sale rule, you would be able to sell the stock and take a $40 capital loss deduction, then rebuy it with a cost basis of $100. Although it may be $140 only a few days later, you don’t report that gain until you sell the stock again, therefore deferring the tax liability.
Here’s the big secret: Cryptocurrency does not follow the wash-sale rules!
As such, you can take advantage of volatility in the cryptocurrency market, locking in your losses to reduce your tax liability and rebuying to defer your capital gains.
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