Buying and Selling Cryptocurrencies During a Crypto Crash

Several weeks ago, the price of the top cryptocurrencies, Bitcoin and Ethereum, crashed by over 60 percent. The reason for this was a number of factors, including China's continued crackdown on crypto. However, many investors believe this is a temporary price dip and that the market will return to its previous level.

Price dips vs corrections

Buying or selling cryptocurrencies during a market crash or correction is risky and should be done carefully. Prices could fall even further, and you could lose your investment. If you do not have the financial resources to deal with a crash, consider other investment options.

A crypto market correction is a period of time when prices fall for a day or more. When a price dips below the level, it was at before. It is usually a sign that investors are tired of the uptrend and are ready to sell.

Crypto market corrections are often a result of sudden changes in the crypto market. For instance, prices are expected to fall if significant crypto exchanges are hacked. Other reasons for a market correction include an overvalued market or regulatory uncertainty.

Market corrections are short-lived price declines, usually from 10% to 20%. However, they are usually triggered by technical phenomena such as a depleting trading volume.

Tax-loss harvesting

Buying and selling cryptocurrencies can cause you to lose money, but tax-loss harvesting is a legal way to pay less tax and reduce your capital gains tax bill. Crypto investors can use capital losses to reduce their capital gains tax on future winning investments. Moreover, the losses can offset capital gains in the same year.

The IRS allows you to offset up to $3,000 of realized losses in ordinary income. You can also deduct up to $3,000 in realized losses if married. You can also deduct up to $1,500 if you are single. But you don't have to pay anything on long-term capital gains if you earn less than $40,000 a year.

However, the IRS does have a wash sale rule that prevents you from taking losses on an identical stock. Crypto markets, however, don't follow the wash sale rule so that you can take losses.

According to the IRS, losses on crypto assets are treated differently than losses on stocks or mutual funds. Therefore, Crypto investors should know their country's wash sale rules before taking losses on the crypto investment.

China's continued crackdown on cryptocurrency

Earlier this year, China's government intensified its crackdown on cryptocurrencies. China's central bank and financial self-regulatory bodies warned against speculative crypto-trading and mining. They also banned financial institutions and payment companies from handling virtual currency transactions.

Chinese authorities also warned state-owned enterprises against mining. They said mining is "extremely harmful" and violates the country's carbon emission goals. They also said it threatens the country's financial system.

In addition, the National Development and Reform Commission (NDRC) said it would cut off the electricity supply for mining. The government also vowed to halt all new mining projects.

The government's crackdown on crypto is mainly expected to increase market volatility. The prices of cryptocurrencies, like bitcoin, has already fallen by around 10 percent.