Why I’m Selling Bitcoin

What's up Wales? It's Megalodon here, and I have no idea why you wanted me to say that as an intro, but there you go. And now we're about to take a bit of a twist because I'm selling some Bitcoin.

It's been an absolutely crazy ride, hitting a high of almost $64,000 before dropping over 50%, seeing regulatory bans take place around the world, and watching Elon Musk influence the market billions of dollars in either direction. Now I get it, it sounds like I've lost my mind, and I'm ignoring all of my own advice when it comes to only investing what you're willing to lose and dollar-cost averaging into the markets over time while you hold on for dear life.

But after doing more and more research online, I’ve got to say it's making some sense to sell. And I think if you just hear me out through the video, by the end of it, you might actually agree with what I have to say. I know that's a really tall order, but just give me a chance to explain myself. And then after, let me know what you think.

Although, really quick, before we go into that, it would mean a lot to me if you sold that like button for the YouTube algorithm by making it turn blue. And best of all, unlike cryptocurrency, like buttons over 10,000 will not be reported to the IRS, so you could smash it as much as you want and all of those like buttons are used to keep.

All right, so here's what happened. In the beginning of January, I made it a goal of mine to begin diversifying my portfolio into cryptocurrency. Now, prior to then, I made a very conscious effort to pay extremely close attention to how I invest my money. And throughout the last year and a half, I've been shifting a lot of my attention to the stock market so I could build a more robust portfolio that isn't just 100% real estate.

But the one asset that I've largely overlooked and never really considered throughout the last decade was cryptocurrency. Now sure, I dabbled here and there, and I bought a little of it three years ago just to try it out, but I never really treated it like a serious investment. For the most part, I dismissed it as something that was too speculative because I never really understood how it worked.

But over time, I had a chance to continue learning about it, and I’ve got to say, the more I immersed myself in the world of cryptocurrency, the more I began to see the potential. In early January, I was in—I invested 1% of my entire portfolio into a 60/40 split between Bitcoin and Ethereum. Back then, Bitcoin was about $30,000, and Ethereum was about $1,150.

But I’ve got to say, once I invested my money, something interesting happened. After I bought in, I reasoned with myself that realistically it's never going to be worth 0, so I could take the risk and increase my allocation to 3% just to give myself a little bit more exposure. And so, after that, I just kept buying in a little bit more.

I honestly didn't have any method or strategy when doing this, but every week or so, I would transfer money to Coinbase Pro, buy Bitcoin or Ethereum, move that over to BlockFi to get paid some interest, and then I would repeat that process whenever I felt like it. Well, I’ve got to say, I hit my target 3% allocation a lot faster than I expected through a combination of regular buying, Elon Musk tweeting about it, and the fact that it doubled and tripled in price.

Although now, after the peak a few weeks ago, things have started to go downhill. In the last 30 days, Bitcoin has lost about 50% of its value, Ethereum is down about 40% from the peak, and even though right now overall I'm pretty much break-even on my total Bitcoin investment, there are portions of my investment which have lost a considerable amount of money. And that is why today it’s starting to make some sense to sell.

Now, I get it; I understand it sounds totally out of character for me to say something like this. I've always been a huge proponent of only investing your money long-term, continuing dollar-cost averaging, and not selling unless you absolutely need the money. Plus, with all of this talk about Bitcoin potentially one day being worth $500,000, the difference in price between $558,000 and $38,000 is pretty nominal in the big picture.

So, what's going on? Well, the reason I'm selling is because of a term called tax loss harvesting. For those not aware, it's a tax reduction strategy which allows you to sell off non-performing assets which have lost money, which then allows you to offset the tax you would otherwise owe on the assets that have made you money.

Now, typically, this is most commonly used with people who invest in securities like index funds and stocks, but with cryptocurrency, it's a totally different animal with a whole bunch of crazy advantages. Don't worry if you're confused; here's how it typically works with stocks. Let's say you went and bought two stocks on January 1st. One of them is up $10,000 in value, and the other one is down $110,000 in value.

Well, ordinarily, if you were to go and sell that first stock for a $10,000 profit, you would have to pay tax on those gains of anywhere from 10% to 50%, depending on your tax bracket. But according to the IRS, you could offset that tax by selling another stock at a loss. And if you structure that correctly, that loss could entirely wipe out the tax you would have to pay on the gain.

Then, in addition to that, if your capital losses exceed your capital gains—meaning you've lost more money than you made—Wall Street bets, then that remaining amount could be deducted from your earned income up to $3,000 a year. And then, any amount above that could be carried forward into future years.

Now, when you apply this overall practice to cryptocurrency, like in my example, it starts getting really interesting. Now, typically with stocks, you have to comply with what's known as a wash sale, which means you can't just go and sell off a stock to offset a tax and then immediately go back in to buy that exact same stock within a 30-day window. The IRS does not allow that because otherwise, everybody would be selling off their losing stocks and then immediately buying back in without paying any tax, so you can't do that.

However, with cryptocurrency, they've said that technically it's not a security; it's property. And therefore, people argue that the wash sale rules don't apply here, which would allow you to sell something and immediately buy it back without worrying about that 30-day window.

The other advantage when doing this is that the IRS says that you could identify which specific tax lots you want to sell and then only claim those losses against your other profits. In this case, I have a chunk of recently purchased Bitcoin, all of which would be subject to short-term capital gains tax at my highest possible tax bracket that I could sell now, use that to offset other short-term capital gains, and then I'm able to rebalance my entire cryptocurrency portfolio.

I could buy a little bit more Ethereum, and eventually, I could buy back more into Bitcoin. Of course, there are a few things that you really got to watch out for when doing this because if you make a mistake, it could potentially cost you a lot of money.

All right, so as I mentioned, even though tax loss harvesting is an incredibly common strategy that a lot of investors use at the end of the year, when it comes to cryptocurrency, there are a few things that you should be made aware of because, for the most part, it's relatively uncharted waters, and there's a lot left open to interpretation.

So first, we've got to talk about the wash sale. With stocks and index funds, it's extremely black and white; you can't buy back in the exact same stock within 30 days. And as long as you abide by that, you're good. But with cryptocurrency, technically it’s not a security; it’s property. So technically, the wash sale doesn’t apply, but that could change at any time.

So you would need to do all of this at your own risk and consult an actual professional for tax advice instead of listening to some guy on YouTube who constantly tells you to smash the like button. The second there is some worry that because the IRS doesn't classify cryptocurrency as a security, and technically a wash sale shouldn't apply, they might try to use something called the economic substance doctrine to try to get their profits.

This is a tax law that says that any transaction must have economic significance aside from just a tax benefit. Or basically, a transaction that does nothing else other than provide a tax benefit is technically invalid under this doctrine. However, others argue that technically, because of how volatile Bitcoin is, the mere act of selling exposes you to market risk.

Therefore, even if you go and buy the exact same cryptocurrency right afterward, the economic substance doctrine wouldn't apply. This also would not apply if you used those proceeds to buy any other cryptocurrency. For example, if you were to sell Bitcoin at a loss and then you immediately turn around and use that money to go and buy Ethereum, that's totally fine.

And even though there's no evidence of this ever being an issue in the past, it's just something to consider. Finally, third, by selling off a portion of your investment and then buying back in later, you’re resetting your cost basis and holding period, which starts over again as soon as you make a new purchase.

That might not be a big deal if you bought in a month ago, but if you're a few days away from hitting a long-term capital gain after holding for a year and you think tax rates are going up, then it might be a better idea to hold off from selling until that year has passed.

In my case, I'm only selling off short-term purchases; I'm too far away from hitting that year mark and locking in the long-term capital gains. And for my situation, selling off the top end of my Bitcoin ends up making the most sense.

Of course, like I mentioned, you've got to keep a really thorough record of all of your purchases and preferably hire a really good CPA to help you out with any of your questions. But from here on out, I'll continue to add onto my Ethereum position as planned. I had a really good opportunity to buy into Bitcoin during the dip when it dropped below $34,000, and I'm still on track to get 5% of my entire net worth in cryptocurrency by the end of the year.

My goal is to keep an allocation of 40% Ethereum and 60% Bitcoin, and if one of those grows faster than the other, like Ethereum has done, I'm not going to worry about it. My plan is to keep buying in at regular intervals, and if I have a chance to save money in the process, like with tax loss harvesting, I’m all for it.

And listen, I want to make it clear for something like this; taxes are an extremely complicated and intricate topic. So I wouldn't just take advice from a YouTube video and then go and do everything else on your own. Instead, do more research, talk with a professional, and then decide what makes the most sense for you.

But you've got to approach cryptocurrency at your own risk because I have no idea what I'm talking about. And listen, make no mistake; losing money is never the goal. And if at all possible, it's a lot better just not to lose money if you could help it.

But realistically, life happens; it's impossible to only make money 100% of the time, and it's up to you to understand the tax code so you can make the most of your situation. Usually, tax loss harvesting is better done at the end of the year, so that way you get the immediate benefit of getting to use all of that on your upcoming tax return.

But because this is a highly volatile asset, it's already dropped a pretty considerable amount. To me, it just seems like the right time to lock in those losses and then use that to offset other profits I make elsewhere. And besides, selling off the top end of my purchases and then making sure I have an equivalent amount of profit to offset everything else stays relatively the same.

I'm not selling anything else; I'm still buying in on a consistent basis. I still believe in Bitcoin and Ethereum long term, and this strategy only makes sense if you have losses that you want to use to offset other profits this calendar year. But still, chances are most of us have something throughout the year that ends up losing some money.

So selling it off and using that to offset other taxes you would owe on profits can be a good thing. So that was my slightly advanced cryptocurrency tax lesson strategy for you today, and I hope that helps make some sense of why I decided to sell off some of my Bitcoin.

And at the very least, I could save a little bit more money on my tax bill, and I'm able to destroy the like button for the YouTube algorithm. So with that said, you guys, thank you so much for watching! I really appreciate it. As always, make sure to destroy the like button, subscribe button, and notification bell. Also, feel free to add me on Instagram; I post pretty much daily.

So if you want to be a part of it, there, feel free to add me. There is my second channel, The Gram Stefan Show. I post there every single day I'm not posting here, so if you want to see a brand new video from me every single day, make sure to add yourself to that. Thank you guys so much for watching, and until next time!