3 Ways to Benefit From the Current Crypto Crash

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The Motley Fool

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Being an investor in cryptocurrencies this year has not been easy. The unrelenting decline in digital assets and seemingly constant cadence of negative news can be discouraging -- even for the most ardent crypto keepers. But as the ancient proverb says, "let not your heart be troubled." Here are three things you can proactively do to positively impact your crypto portfolio.

1. Harvest crypto losses to lower taxes

This week, the IRS announced that it will start accepting returns for the 2021 tax year. When it comes to tax minimization tactics, cryptocurrencies can be excellent tools to easily "harvest losses" if you're looking for some tax write-offs or offsets for other investment gains.

Volatility is an inherent attribute of cryptocurrencies and smart investors can use its perpetual state of flux to their benefit. When wide swings happen -- such as the current 30% drop -- it's extremely wise to take a loss if you can. Say you bought Bitcoin at its November price peak of $69,000 per coin, and today it's trading at about $38,000 per coin.

You can exchange that Bitcoin today for a stablecoin , or any other cryptocurrency, and then immediately buy back that same Bitcoin within minutes. There is no 30-day repurchase waiting period -- known as the wash sale rule -- as with other securities. Using the example above, you're able to record on the blockchain the 45% decline in value and capture a $31,000 loss that can be amortized for years on your tax returns going forward.

The IRS currently allows you to deduct a capital loss up to $3,000 from your ordinary income in a given tax season. The remaining amount of additional losses can be carried over indefinitely into future tax years until you have none left. Taking advantage of this unique crypto wrinkle is a completely legal, highly effective way to intentionally harvest losses by locking in a tax offset against other gains you may have had. However, the government could do away with that crypto tax benefit at any time, so take advantage of it while you can -- be sure to check with your accountant or tax professional.

2. Make your crypto work for you

If you have a handful of different crypto coins or tokens in your portfolio, it might be worth your while to check out . The website has dozens of coin options such as Cardano, Ethereum, Solana, Polygon, Cosmos and more that provide annual percentage yields between 5% and 50% depending on the demand for the respective crypto. To capture those uniquely high yields, you'll need to "stake" or place your respective crypto asset in a pool of the same asset with other investors. Your cryptos provide the necessary amount of currency or "liquidity" for others to complete transactions.

You earn interest for providing that service of storing your digital assets and not using them. This is a very simplified overview and there's a lot to staking or decentralized lending (which is another way to put your cryptocurrency to work), but these are great ways to generate passive income from a dormant asset that you would otherwise just be storing. According to Bankrate, the average interest rate for a banking savings account is an anemic 0.06% -- crypto staking can do much better than that.

StakingRewards has a lot of educational resources and guides to get someone started. As always, be sure to do your own research so you fully understand the risks and requirements before committing any digital funds.

3. Do what Warren Buffett does

With a more than 50% drop in Bitcoin and many other cryptos with losses in the 20%-30% range, now is the time to buy proven assets at deep discounts. That's the tactic that the greatest investor ever, Warren Buffett, has used to make billions over the years.

Buffett is famous for saying, "Be fearful when others are greedy, and be greedy when others are fearful." Right now, the Bitcoin investing sentiment -- which is a reliable indicator for the entire crypto sector -- is extremely fearful. I mean that literally. The current Bitcoin Fear & Greed Index shows that investment sentiment is currently in a state of "extreme fear," making it a perfect time to bargain hunt or at least initiate a weekly or monthly dollar-cost averaging program to even out your investment entry points within crypto. Yes, it's counterintuitive, but it's also how you "buy low, sell high" and it's usually uncomfortable.

The time to buy Bitcoin was not on the runup to its all-time high of $69,000 this past November. It was during the pandemic-induced market panic in March 2020, when it crashed to $4,000 per coin.

Life-changing fortunes are made during bear markets by making steely investments in high-quality, undervalued assets when others are panic selling. That's true for any type of investment, but don't take my word for it -- the Oracle of Omaha has proven it time and time again.

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Tor Constantino owns Bitcoin and Ethereum.

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