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A growing number of financial advisors are not only allowing clients to trade cryptocurrencies inside their fund or retirement accounts but also are advising clients to use cryptos’ price gyrations as a tax gimmick.
The scheme: investors can buy crypto through their brokerage accounts. If the coins’ value falls below a preset amount, the coins will automatically be sold and investors can write off the loss against profits from other investments.
The accounts can then quickly buy back the coins, if the investor wishes, and wait for the price to bounce up again, selling them at a profit.
The tactic is forbidden by Internal Revenue Service rules governing stocks and bonds but is allowed for digital currencies, which the IRS defines as property and not investment vehicles.
The automated sale and repurchase of the coins is a key selling point for asset managers; individuals trading on their own often must place buy and sell orders manually and can easily miss the moments to maximize profits or losses.
Also, benefits of automated “tax-loss harvesting” usually more than cover any fees for the service, brokers told The Wall Street Journal.
A poll of 529 asset managers earlier this year by financial planning associations found 14 percent already were recommending crypto as part of clients’ portfolios and 25 percent planned to increase their use of crypto in the next 12 months, the WSJ reported.
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