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00:00 Speaker A
It’s been a wild year for crypto, Bitcoin hitting record highs and experienced major sell-offs. Now the cryptocurrency’s decline is creating more opportunity for tax loss harvesting. Tax loss harvesting means selling investments at a loss to offset your capital gains and lower your tax bill. Join me now, got Lee Baker, Claris Financial advisors founder. Lee, it’s good to see you. So,
00:30 Speaker A
maybe Lee, uh we’ll start with the basics here. It might be useful. Could you give us Lee uh a plain simple example, hypothetically Lee of let’s say a stock gain and a Bitcoin loss and how they would sort of interact on my tax return?
00:54 Speaker B
Yeah, absolutely. So imagine if you will back in in January of this year or perhaps even let’s take it a few weeks farther back to December of 2024 and perhaps you bought uh a few shares of Delta uh airlines. And Delta’s done pretty good here in 2025 so far and and you you’ve made maybe about 10 bucks a share on that Delta transaction. But as 2025 played out, you know, you got real excited about Bitcoin and around fall, you know, Bitcoin’s up at about 126,000, you go, wait a minute, I got to get in. I don’t want to miss the boat. And here you are, you know, eight or 10 weeks later and you’re starting to feel bad because Bitcoin has dropped by uh you know, down to the, you know, 86,000 range. You can take that loss in Bitcoin that you’ve experienced here in the last few months and use it to offset some of the money that you’ve made in Delta over the last 12 to 13 months to uh help out your tax picture significantly.
01:43 Speaker A
So Lee, that was a perfect example. Very well said. You make another point here, which I want to I want you to highlight for us. You know, crypto doesn’t currently follow a wash sale rule the way stocks do. Explain that, Lee, why that’s important? How does that impact investor behavior?
02:04 Speaker B
Yeah, because at the end of the day, we got to remember, we’ve always got to have a little bit of a conversation with Uncle Sam if you will. And so the rules set forth by the IRS say that, hey, listen, you can sell something at a loss, you can turn around and buy something else, but you can’t buy that same thing or something very similar to what you sold within a month. Otherwise they’re going to say, hey, listen, you can’t have that deduction. So as an example, I can’t uh buy Delta today, turn around, sell it tomorrow and re-enter it and take a loss if there’d been a drop in Delta today. Uh so that’s really kind of the wash sale rule says, listen, you got to sit out so to speak, uh for at least a month before you can get back into that specific game or that specific stock. Otherwise, we’re going to say no to that deduction.
03:00 Speaker A
So just to make sure I understand, Lee, that means if I’m a long-term Bitcoin bull, I could sell today for a tax loss, but then buy it back almost immediately without a penalty.
03:08 Speaker B
Yes, and that is very specific to Bitcoin or cryptocurrencies, right? Um right now, and again, you know, this is one of those opportunities where hey, we may look up in a year or two and the IRS has sort of tightened the the the new so to speak around that opportunity. But as we stand here today, you know, if you’re trading directly in, you know, Bitcoin or Solana, one of the other cryptocurrencies, you’re absolutely right. Uh we can sell today, you know, take the advantage of that loss we’ve had here over the last few months and get right back into Bitcoin because we think that yeah, uh there’s been a pullback but we think things are going to look a lot better in 2026.
04:02 Speaker A
Does the strategy we’re talking about here, Lee, tax loss harvesting, does it work the same way for spot Bitcoin as Bitcoin ETFs?
04:15 Speaker B
No, it does not. And and that’s a great question. Uh so we’ve had a lot of entrance into the fund complex, if you will. So the the Black rocks and Invescos of the world have made it a lot easier for regular folk to invest in Bitcoin and cryptocurrency, but those are registered as funds and so if you buy an ETF or an exchange traded fund or exchange traded product that invests in in cryptocurrency, then you’ve got the traditional rules as it relates, you know, as though it were a stock or another mutual fund. So it’d be just like if you sold one S&P 500 index fund, uh you couldn’t turn around and say, hey, listen, I’m avoiding wash sale because I I sold my uh Vanguard S&P 500 and turned around and bought a Fidelity S&P 500. So that’s an excellent question. It is in fact different if you buy crypto through a fund.
05:27 Speaker A
One question I always have, Lee, let’s say you engage in this kind of tax loss harvesting. How long, Lee, do you tell clients, okay, you need to keep your paperwork. You need to keep your records in case the IRS comes knocking and asking questions. I mean, is there actually a time frame you should keep it, Josh, one year, three, five, seven?
05:44 Speaker B
Yeah. So, you know, I like seven uh and part of that’s because everything’s digital nowadays. Now, if you’re investing directly in cryptocurrency, you’ve got some additional things to to take uh into consideration, you know, access. Uh if I’ve got an account at Schwab and I lose my password or something along those lines, I can get that back. But again, you know, we’ve talked in in the past about those uh parameters around making sure that you keep access to all of your crypto information. So again, since everything’s digital, keep it seven years. Uh you know, you might have somebody argue against all the the space we’re taking up by uh keeping digital copies of everything. but seven years is a lot easier to handle. At least you don’t have that much paper lying around the house.
06:29 Speaker A
Finally, as we spin ahead to 2026, I’m just curious, what what’s going to be changing Lee between the IRS and crypto? What what do we need to be aware of?
06:41 Speaker B
Okay, so one of the biggest changes uh that’s coming is there’s going to be a new 1099 that everybody has to be aware of and it’s the 1099 DA, think digital assets. Uh so for years we’ve been accustomed to getting 1099 miscellaneous or 1099 div, DIV for years. One of the things that is coming now is the IRS has told all those folks, hey, listen, uh you’re going to have to start issuing a 1099 uh for people’s cryptocurrencies and that will be the 1099 DA like digital assets.
07:22 Speaker A
Lee, great to see you on the show today. Thanks so much for your time. Appreciate it.
07:26 Speaker B
Thanks for having me. I’ve enjoyed it. And happy New Year to you.
07:29 Speaker A
You too, sir.