Why are dips good?
Aloha gang. If you’ve been tracking the crypto market as of recent, you may have witnessed the highest pullback to date in crypto’s bull run. The price of Bitcoin touched a low near $30,000 but has slowly made its way back to $37,000 as of this writing. For those unfamiliar to these price swings, it echoes the warnings of crpyto’s highly volatile nature, which, in fact, is very prevalent. For those accustomed to this space, it is just part of the territory. Volatility in an asset class is an unwelcome guest; however, it still deserves an invite to the party unfortunately. Without it, you don’t have risk, without risk there’s no growth, and without growth, you have a…(insert your low yielding asset here, i.e savings account, treasury, etc.) With this volatility you will, of course, experience - and when you lose a large part of your investment, it is an experience - the associated highs and lows. Everybody enjoys it when their investments are on the uptick; but it’s the opposite that I would like to focus on here. The dips. More importantly, how they can be of benefit to you should you ever find yourself in one.
Tax loss harvesting is the selling off of securities or property to offset capital gains liability. Basically, it’s reducing the amount you’re taxed on a short or long term gain. Typically, if you sell a security or in the case of Bitcoin, a property, you will have to pay taxes on the gain realized from the sale of that asset. If you have an asset that underperforms, and you sell it less than what you bought it for, those losses can be credited to offset the tax on the money you made on the sale of another asset. For instance, let’s say you buy Stock A and over the tax year you sell it and make $2000 on it. That $2000 now carries a capital gains liability. You purchase another stock, Stock B, but this time you lose $2000. If you sell Stock B and claim that $2000 loss, you avoid paying the capital gains tax on the $2000 you made with Stock A. Therefore, if you bought Bitcoin around its highs, say $60,000, and it drops to $30,000, you can sell off that loss and claim it against any profit you may have or will make in the future that year. Normally, investors that sell off their securities to accomplish this have to wait 30 days before they can purchase another security or the exact same one they sold. This is known as the wash sale rule. However, cryptos like Bitcoin and Ethereum are taxed as property by the IRS and are not subject to this regulation, which leads me to my second point.
Buy the Dip
If you’ve been around the cryptospace for a while, you should be very familiar with this term. Remember: Bitcoin is a deflationary asset. There will only be 21 million of them mined. The more you can accumulate during these dips the better off you’ll be; and, referencing to my first point, now that you sold off your loss to balance out or reduce your tax liabilities, you can take advantage of this dip and buy back in at a lower price without being subject to the 30 day period that typically accompany securities trades.
Dips are never a welcome event no matter what asset you are holding on to; however, they do provide an opportunity to lessen your tax burden as well as afford you an ample opportunity to buy in at a discount. As always, I encourage you to do your research whenever you are investing your hard-earned dollars.
*Disclaimer: I am not a financial advisor and this article is for informative purposes only. Should you choose to invest in any of these stocks, please do so at your own risk.