Crypto Rebalancing and US Taxes

By Chandan Lodha (@cglodha of @cointracker_io) and Benjamin Lakoff (@benlakoff of ITF - @tryITF)

Portfolio Rebalancing

The process of auto-rebalancing ensures that your portfolio of alternative assets maintains a target asset allocation. This can be automated to incrementally sell your assets that have gone up significantly and redistribute these proceeds to those assets in your portfolio below your desired threshold, potentially giving you automated discipline to buy low and sell high. In turn, your portfolio stays properly allocated through the chaotic upward and downward swings of alternative assets.

The advantage of automating this process is that you can improve your risk-adjusted returns on a portfolio of assets (such as your crypto portfolio) without having to do any manual work on an ongoing basis. By using a service like ITF Portfolios, you can automate your rebalancing strategy by configuring your preferred asset allocation once and letting the software do the rest of the work.

Rebalancing Example

Let’s look at an example to see the impact of portfolio rebalancing on a portfolio.

Assume Maya decides to invest $1,000, split equally between Bitcoin (BTC) and Ethereum (ETH). This individual will have a 50/50 split of BTC ($500) and ETH ($500) in her portfolio:

Let's assume that Maya is busy and chooses to hold her portfolio steady for investment purposes (no trades).

The crypto markets move up and down during the year, resulting in the value of BTC increasing and ETH decreasing, but the total portfolio value unchanged.

If Maya had used ITF’s rebalancing feature during that year instead, she would have instead sold $250 worth of BTC automatically for ETH and brought the portfolio back to the original allocation.

With rebalancing, Maya is able to automatically realize capital gains on profitable investments within the portfolio, and reinvest them into other assets that have not performed as well in comparison.

In Maya’s case, ITF’s software was able to rebalance their BTC and ETH holdings to account for the market movements. Otherwise Maya would have been underexposed to ETH and overexposed to BTC compared to her desired portfolio allocation.

US Tax Implications

The Internal Revenue Service (IRS) has released guidance that selling or trading a cryptocurrency asset (including for another cryptocurrency asset) is a taxable event.

That means that rebalancing your cryptocurrency portfolio will lead to taxable events that you are responsible for reporting.

Make sure you aren’t stuck with unanticipated capital gains/losses that you don’t know about!

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This may seem like a headache, however there are services like CoinTracker (shown in the image above) which can help automate all of these calculations for you.

CoinTracker automatically syncs all your transactions & balances across top cryptocurrency exchanges and local wallets. It then calculates your cost basis and capital gains across your whole portfolio as each transaction occurs, and outputs a completed IRS Form 8949 (capital gains form).

Sample capital gains form from CoinTracker

For example, in the case above, if ITF facilitated by rebalancing Maya’s portfolio, there would be a capital gain event that CoinTracker would automatically capture from her synced accounts and exchanges.

Specifically, in this case $500 of BTC appreciated to $750 of BTC, and $250 (or one third of the total BTC) was sold for ETH. Therefore one third of the capital gain — or ⅓ * ($250) = $83.33 — was realized.

If Maya were to instead rebalance weekly or even daily, instead of annually, CoinTracker would still capture all of those rebalance transactions and neatly incorporate them into the capital gains calculations.

Even in years with huge capital losses (such as 2018), CoinTracker can help Maya claim capital losses.

These can be used to offset capital gains in other asset classes, other types of income, or gains in future tax years. In many cases these can be to the tune of thousands of dollars or more in savings, so see how you can get started.

What are you waiting for? Create an account to start rebalancing and tracking your cryptocurrency portfolio today!

Have questions or comments? Let us know on Twitter @cointracker_io and @tryITF.

And in case you missed it...

If you're interested in learning more, check out our eBook, "Rebalancing a Cryptocurrency Portfolio: How to Intelligently Invest in a Highly Volatile Market."

Get your free copy now

Inside, you’ll find extra insights and considerations to further your reading on rebalancing a portfolio of crypto assets.

Read online or download the PDF here for easy access for when you’re offline.


Disclaimer: the articles provided by IT Alpha d/b/a Intelligent Trading Foundation (“ITF”) and CoinTracker are provided for informational purposes only. This post does not constitute investment advice, financial advice, or trading advice. ITF does not recommend that any specific cryptocurrency should be bought, sold, or held. Digital assets exist in a volatile and high-risk market, and their value can change frequently and without notice. ITF and CoinTracker take no liability for any decision(s) made or action(s) taken by any of our readers. Our articles are not meant to replace independent financial advice, and we strongly recommend any purchaser of digital assets, even if such user is experienced and affluent, seek independent financial advice in the content of their own unique circumstances.

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