In the past few years, cryptocurrency has cemented its position in the investment sector. In October 2021, Bitcoin reached an all-time high of $67,000, but in the year 2022, the value of the digital currency dropped significantly, while other cryptocurrencies tanked even further.
In this extremely volatile market, you have to know ways to invest in Bitcoin and save yourself from a crypto tax loss. If you make a few bad decisions in the unchartered territory of digital currencies, you can even get into debt. So, here are a few ways to carefully invest in Bitcoin and stay away from crypto tax loss.
Invest Only What You Can Afford to Lose
Some investors thrive on risk while others get nervous about taking financial risks. If you like taking risks, invest only what you can afford to lose. The key goal of making an investment is to add to your existing wealth and not lose it entirely.
One of the smart ways is to invest some money in Bitcoin. It’s more like diversifying your portfolio. Moreover, it is a rule of investment to invest as someone else. It doesn’t matter if you take a risk or not. What matters is you invest within your risk tolerance.
Keep a Healthy Crypto Portfolio
Investing in Bitcoin is a good idea, but you should invest in other assets well. The diversification of your crypto portfolio keeps your portfolio healthy. The cryptocurrency market is volatile, but all of them will not fall simultaneously. This strategy can increase profits and minimize losses.
Investing in various crypto tokens will protect you against potential risks and you won’t be exposed to a single investment. Look at it this way, you can win some and lose some, which is preferable to losing everything. Diversification can save you from losing everything and stabilizing your gains.
Don’t Invest Based on Hype
Ignoring the hype around any cryptocurrency investment is important. Crypto investments should be made based on technical and fundamental analysis and not based on what others are saying.
Making investments based on hype can be extremely risky as prices could tank, resulting in a massive loss. Research and market analysis allows you to take calculated risks and if you cannot do it, you should seek expert advice. It can not only save you from investment loss but also from crypto tax loss.
Start Small and Then Go Big
Given the unpredictable behavior of cryptocurrency, it would be wise to start your investment with a small amount. Investing in cryptocurrency is just like investing in any other currency in a few aspects. You have to remember that the value of the token fluctuates.
Even the most experienced investors allocate a single-digit percentage to cryptocurrency and invest heavily in less volatile assets. Never invest in any cryptocurrency that promises massive upswings regardless of the hype and forecasts.
Keep it Safe
When you invest in cryptocurrency, never leave it on the exchange. Crypto exchanges are prone to hacks and breaches. As a result, you can lose all your investment. As soon as you buy a token, move it to a wallet, preferably a hardware or a cold wallet. A hardware wallet is a physical device that stores your private keys offline. Investing in a hardware wallet
Final Word
Investment loss and crypto tax loss are two things that you don’t want in your portfolio. You can avoid investment loss by following the tips above and you can avoid crypto tax loss by using a crypto tax software that automatically calculates everything for you. ZenLedger is such software that automatically calculates capital gains and losses, and fair market value, and even fills out all the necessary tax forms for you.
FAQs
1. Is tax loss harvesting worth it?
One of the biggest benefits of tax loss harvesting is that it reduces regular income since tax rates are higher on income than long-term capital gains rates. Even if you didn’t incur any capital gains tax in a fiscal year, you can use $3,000 of your capital losses to lower your income tax.
2. How long can you tax loss harvest?
An investor can write off up to $3,000 in a financial year. However, long-term losses can be moved forward to the coming fiscal years. For instance, $9,000 can be paid over the course of three tax years.
3. Can crypto losses offset income?
The IRS lets taxpayers use losses in stocks and other investments such as cryptocurrencies, to offset gains. If your losses are more than your gains for a year, you can deduct up to $3,000 from your tax report.
4. How much tax-loss harvesting is too much?
For unmarried taxpayers, the limit to offset gains is up to $3,000, but for married couples, the limit is $1,500. Long-term losses can be moved forward to coming tax years.
