Why did Michael Sailor sold his Bitcoin?
Michael Sailor is a huge proponent of Bitcoin maximalism. As a result, his company, MicroStrategy, has been purchasing bitcoins for their corporate balance sheet for the last few years. However, the news made headlines this week when MicroStrategy revealed that they had sold some of their bitcoin. Michael Sailor stated unequivocally that they would never do such a thing. As a result, many individuals were shocked. MicroStrategy sold 704 Bitcoins on December 22. However, they purchased 810 Bitcoins more just two days later. So, what exactly is going on here? Did they decide to sell and then change their minds, so they bought some back? Were they simply attempting to move the markets and profit from minor price differences? Or did it have to do with taxes?
That is exactly what they did, according to Michael Sailor. This was for tax purposes. In a moment, we'll go over the specifics of how this works. But the main thing you should know is that if you currently own cryptocurrency such as Bitcoin and are experiencing an unrealized loss, you can do the same thing. And this year, 2022, may be the last chance. So, if you're reading this before January 1, 2023, you can benefit from claiming those losses without selling your Bitcoin position.
This is all because of something called a wash sale rule, which most people are unaware of. If you invest in stocks, mutual funds, or ETFs through your brokerage account, retirement account, or IRA and say you have Apple(AAPL) or the S&P500(SPX) in those accounts, you cannot take losses unless you exit the position. Here's an illustration: let's say you own Apple (AAPL) stock, and it's down 10%. So you sell it and never buy it again. The IRS then says: "OK, we will allow you to claim that loss", and that loss can then be offset against any gains you have. However, if you decide to sell your Apple stock at your 10% loss and then change your mind and decide to buy back within 30 days, you will no longer be able to claim that loss. If you make a $1,000 loss on the sale, that $1,000 loss is rolled into the cost basis of the new shares you just purchased. That is, you will be able to capture that loss when you eventually sell those new shares, but not before.
So, if I can't take a loss if I reinvest in the position, does that mean I won't be taxed on profits? If I make a profit on something and then reinvest the proceeds within 30 days? That is not the case. The IRS will make certain that you cannot claim those losses, but they will undoubtedly tax your profits.
Many investors now use a technique known as tax loss harvesting to avoid the wash sale rule at the end of the year. So, if you have something like SPX, the S&P500 index fund in your account and it's down 10%, many people will sell it and use the funds to purchase something like VTI, the Vanguard Total Stock Market Index fund. They perform nearly identically because they are invested in nearly identical stocks, but they are not the same thing. So you take a loss on one thing, reinvest it in something with very similar, if not identical performance, and you get the best of both worlds. The only thing to watch out for if you're going to try to use tax loss harvesting is that you don't invest in something that is substantially identical to what you sold.
For example, suppose you sell SPX, an S&P500 index fund, and buy VOO, Vanguard's S&P500 index fund. In that case, the IRS could claim that they're substantially identical and apply the wash sale rule retroactively to your initial sale, your initial repurchase of those new shares, and then charge you taxes, fees, and penalties for claiming a loss that wasn't actually there.
So, what do Bitcoin and MicroStrategy have in common? Well, this wash sale rule does not apply to crypto. We know that MicroStrategy has been buying up a lot of Bitcoin throughout the entire bull run. As a result, they purchased significant amounts of bitcoin, most likely between levels of $40K, $50K, and $60K per Bitcoin. We also know that the current price of bitcoin is around $16K. So, while they sold 704 Bitcoins on December 22 for approximately $11 million, they could have spent at least four times that much to buy those same 700 Bitcoins somewhere near the top at around $60K, which means they could be claiming a capital loss of $30-40 million or more, by selling those bitcoins. Because the wash sale rule does not apply to crypto, they can buy back Bitcoin a few days later and still claim the loss, even though they jumped right back into the same position.
If you are currently sitting on losses on your crypto, on your Bitcoin, you can do the exact same thing. You can sell them before the end of the year so that you get to claim those losses for 2022, and then you can just buy them back again. The IRS doesn't care about it for now, but this might be the last year this is allowed. As more and more political scrutiny is coming into crypto, more regulation will enter the space. It's possible, and in my opinion, very likely, that we start to see the wash sale rule being talked about to be applied to crypto as well.
Now, one final word on these capital losses. The main advantage here is that if you have $10,000 in crypto losses, you also have at least $10,000 in gains to offset those losses. If you only have pure losses, you will be limited in how many of those losses, and how much money you can take in one year. Unfortunately, you will be limited to $3,000 in losses under current tax laws. So, if you have $10,000 in net gains on your investments, you can deduct $3,000 this year, another $3,000 the following year, another $3000 the year after that, and another $1000 the year after that. This also means that if you have losses of $100K or $200K, you will carry those losses for the rest of your life. However, if you have gains that can be offset by taking losses, using crypto could be a significant advantage, especially given that this may be the last year in which the wash sale rule does not apply to crypto.
In the UK, the equivalent of the wash sale rule is called the "no gain/no loss" rule, and it is governed by Section 104 of the Taxation of Chargeable Gains Act 1992. Under this rule, if you dispose of an asset (such as shares in a company) and then repurchase the same asset within 30 days, the disposal and repurchase will be treated as a single transaction for tax purposes. This means that if you made a profit on the initial sale of the asset, you would not be able to offset this profit by claiming a loss on the repurchase of the asset. Instead, the profit and loss will be cancelled out, and you will not have to pay tax on the transaction.
It's worth noting that the no gain/no loss rule only applies to disposals and repurchases of the same asset. If you sell an asset and then purchase a different asset, you will not be able to offset any gains or losses on the initial sale against the costs of the new asset. You will need to pay tax on any gains you make from the sale, and you will not be able to claim any losses on the new asset against those gains.