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I am curious about tax implications and any law/rule regarding the execution of a stop-loss order (realizing a gain), and then deciding to buy back into that same asset in a short period.

For instance, today The crypto markets took a dive and I hit a stop-loss on ETH. ETH is now hovering just above where it sold. Now, obviously I owe capital gains at this point for any realized profit from the transaction.

I’m wondering if, in the case I decide to buy back in because the market feels like the bottom isn’t falling out; is there a way to save that tax burden since I’m really not taking profits and intend to stay in the investment.

I guess first question, can the Wash-Sale Rule act in an opposite fashion, whereas it would protect me from seemingly undue taxation?

Since that rule prevents people from cheating on taxes (harvesting a loss, then buying back immediately at the same price), it sure would be neat if it could work to protect us from the grubby hands of the IRS in an equal but opposite fashion. It would suck to have to take invested money off the table to pay that tax bill when I am trying to re-enter the investment and plan to pay the capital gains once I actually sell to either enter another asset or simply take profit.

Any insight is appreciated.

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  • Also, could this fall under a like-kind exchange?
    – J Brooks
    Commented Jun 7 at 21:12
  • The last I knew, the wash sale doe not apply to crypto because the IRS considers virtual currencies to be property. However, there have been attempts to make the wash sale rule applicable but AFAIK, so far, they have not been successful. Commented Jun 7 at 22:23
  • @BobBaerker why would wash sale rules not apply to "property"? You might be confusing with 1031 exchange.
    – littleadv
    Commented Jun 8 at 6:40
  • @JBrooks 1031 exchange is for real estate only, but in any case the transaction would have required an intermediary which you didn't have.
    – littleadv
    Commented Jun 8 at 6:41
  • @littleadv Presumably he traded on an exchange, so he had an intermediary. But it doesn't matter now since the law was changed to limit 1031 exchanges exclusively to real estate. Commented Jun 8 at 7:59

2 Answers 2

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There is no wash sale rule or other mechanism to avoid paying taxes on gains in isolation. Wash-sale rules (at least in the US) only exist to prevent you from accelerating tax deductions for losses without exiting your position within 30 days. Even then they only defer the loss until you do close your position.

The good news is that you have another 6 months to do some tax planning. Any losses you realize this year can be offset against those gains, so you could consider cutting some losses this year, with the tax benefit being an added incentive (but hopefully not the only one).

Taxes can be a wake-up call if you hadn't planned for them, but consider the alternative - you could have ridden ETH down further and had less gain to pay taxes on. Personally I'd rather pay 30% tax on a $1,000 gain than have a $500 gain or worse (and still have to pay taxes). I'm no fan of paying taxes either, but there are worse alternatives.

Going forward, you can plan your transactions keeping potential tax liabilities in mind.

If your gains are high enough, you can hire a professional tax/financial advisor to help you make tax-aware investment choices, but for most people it isn't worth the expense.

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is there a way to save that tax burden since I’m really not taking profits and intend to stay in the investment.

No. The sale transaction happened and the gain realized. What you do with that money is irrelevant.

There's no "wash sale rule in the opposite direction", doesn't exist.

It would suck to have to take invested money off the table to pay that tax bill

Such is live.

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