Tips To Work With Your Advisor To Save On Taxes This Year
We're reaching year end, and so from an investment perspective, you're probably feeling like me - you can't wait for 2022 to be over. But there is something we can do to get out of this with a little less pain. And to help us talk about that, I'm very happy to bring back onto the program a good friend, Matt Hougan, CIO, Chief Investment Officer of Bitwise Asset Management. Matt, welcome back to the show.
Matt Hougan: Thanks for having me back, Ric.
Ric Edelman: This has been a dreadful year in the financial markets, but the good news is there's something people can do about it before year end, isn't there?
Matt: Yeah, it's definitely making lemonade out of lemons time. And what you're talking about, of course, is tax-loss harvesting. When you have positions that have fallen, you can sell those positions, lower your taxes and then reallocate back into the market. And when markets are down, it's an opportunity to lower your near-term tax bill and many investors will find that valuable.
Ric: The problem with selling is that the IRS generally says if you sell an investment and you take that loss, you can't buy back that investment for at least 30 days. Well, that leads a lot of investors to say, well, I don't know if I want to play that game because with my dumb luck, I'll sell today, get the tax break, and then before I buy back in, in a month, the market will recover and I'll miss out on all of that profit. How do you deal with that issue in the world of crypto?
Matt: Yeah, well, first of all, they're right to be concerned about that. So what you need to do is to find a way to sell one investment and invest in another. So what they say is you can't invest in a substantially identical position. What you have to do is buy something different. So you get to write off up to $3,000 of ordinary income. Of course, you should consult first with your tax advisor.
Ric: And not only can you write off $3,000, but you can also use it to offset gains you have in other assets. You just wrote a white paper on all of this, Matt. And how do we get the white paper that you've just written on tax-loss harvesting?
Matt: If you go to BitwiseInvestments.com to our Insights page, you can download the white paper. And the white paper I think is the first study of what happens if you apply tax-loss harvesting to a crypto portfolio. Crypto is the best performing asset class in the world over the last five years and it's had five 50% plus drawbacks. Each of those drawbacks was an opportunity to harvest losses, lower your near-term tax bill and compound what people are calling tax alpha. The study we did looked at the returns of investment in Bitcoin from 2014 to 2022, and of course that was a spectacular investment up 2300%, 2400%. But if you add in tax-loss harvesting into it, you gained almost an additional 1000 percentage points over that period of time. Now, of course, there's no guarantee that will continue in the future. But I think you, me and everyone does believe that crypto will continue to be volatile in the future. So adding a tax-loss harvesting discipline on top of your crypto investments can lower your bill, generate tax alpha, and create the opportunity to compound greater returns if and when crypto recovers in the future - which of course I think it will.
Ric: Again, you can receive that report at BitwiseInvestments.com. Let me ask about one other element of this notion of tax-loss harvesting. We talked about the fact that when you sell a security, you have to wait 30 days to rebuy it, and that is giving some investors pause. You know, Bitcoin is a one-of-a-kind, unique asset. You can't easily sell it and buy something similar because there's really nothing similar to it. But some folks argue that you don't have to wait 30 days if you sell Bitcoin to rebuy it. You can sell it today and rebuy it immediately because Bitcoin is not a security and therefore it doesn't fall under the wash-sale rule. Do you subscribe to that approach?
Matt: That's a popular approach and it does meet the definition of the law. I know that the IRS is looking at that. I'd encourage people to consult with their tax advisor, but if you Google wash-sale and Bitcoin, you'll see a lot of very serious firms, major tax institutions that provide exactly that advice. So there is nothing better than paying less taxes at the end of the year. It feels great and you can be smart about it, act on it today and reap those benefits. It's a really great thing to do.
Ric: But is there any reason not to tax-loss harvest in crypto?
Matt: You could miss significant returns. We've looked at studies that showed if you've been out of the crypto market for the 10 best days over the last five years, you've missed out on all of the returns of crypto, so you really do not want to step out of the market. There's of course trading risk, execution risk and if you sell one thing and buy something that's different, you could get different returns. But this is a tried-and-true discipline. I know that applying it to crypto is a new idea. But people have been harvesting tax losses in stocks and bonds for more than 100 years. This is a well-established thing to do. It has real benefits. Investors should consider the risk, but they should also consider if this is right for them. And what.
Ric: Are you hearing from advisors about all this as we approach year end?
Matt: Yes, and I’m hugely excited about it. Advisors are going into the year end. They're going to be having conversations with their clients. Those conversations are going to be difficult, not because of anything the advisor did, but because the market is down. They want to have a positive thing to discuss with their clients. One of the things they can discuss is, look, we don't control the markets, but what we can control is taking smart actions, understanding the tax code and lower your tax bill. It's something that advisors are very excited to have a conversation with their clients about. I know Bitwise is talking with a lot of financial advisors about how to do it within a crypto setting, so I think it's going to be a big thing as we approach the end of the year.
Ric: You know, it's one thing to acknowledge that you can make the situation a little bit better by playing this tax strategy. But more fundamentally than that, Matt, let me ask you, with crypto down so much this year - you know, it's down 70% from its high, I have people just, you know, the heck with the tax law strategy just getting out of crypto entirely. Are people giving up on the notion of crypto and what are advisors doing with their own personal investments in crypto?
Matt: Yeah, but not the advisors we work with. We've had very few redemptions at Bitwise and when we talk to the largest institutions, the largest financial advisors, they're still engaged in crypto. It is down significantly. Crypto has been down significantly before. You know, it moves somewhat in four-year cycles, three up years and one pullback year. That's what it's been doing since 2011. This is the pullback year. Yes, it's been painful. If anything, we're finding advisors are rebalancing their portfolios, maybe adding to their crypto positions to get them back to the one or two- and one-half percent level that they've been targeting. We've had very few that are stepping out of the market underneath the surface. Despite what you're seeing in price trends, the fundamentals of crypto are very strong. The investors we talk to are looking past this crypto winter and looking at the crypto spring that's coming and most of them are very excited about that.
Ric: That's Matt Hogan. He's the chief investment officer of Bitwise Asset Management. Now you're beginning to get a sense of why I'm such a big fan of Bitwise, why I'm not only invested in the company itself, but also I'm an investor in several of the funds that Bitwise offers, and you can learn all about those at BitwiseInvestments.com. Matt, thanks so much for joining us on the show today.
Matt: Thanks for having me, Ric.
Ric: As always, Matt and I had a conversation much longer than you just heard here on the radio. You can listen, watch or read the entire chat. Just go to TheTruthAYF.com.