Santa, crypto and tax loss harvesting

The end of the year is a special time for many reasons. 

The fall is in full swing. The leaves paint a mosaic of color. And the apple cider flows. 

There is US Thanksgiving and the retail extravaganzas of Black Friday and Cyber Monday. 

This time of year is also tax-loss season and the potential for a Santa rally. 

These two events are an important part of traditional markets. And in time tax-loss season will become more important for crypto too. 

Now to be clear, what follows is not financial advice or tax advice. You should always consult your advisor or a professional in these areas for specifics on these topics. The objective is to bring your attention to a seasonal catalyst so that you can explore how and whether you might want to use it. 

So let’s take a look at what brings together Santa and tax-loss harvesting. 

And we’ll also explore how you might be able to use this season to your advantage even if you aren’t harvesting tax losses. 

Santa underwater with scuba gear on, surrounded by various fish. Image courtesy of Georges Desipris at Pexels.

Understanding the value of capital losses 

The end of the year, for investors and traders, involves decisions to be made about positions and capital gains. 

Individuals and portfolio managers use this season every year as part of their tax planning.

In years where gains are plentiful, portfolio managers reduce the taxes paid through tax-loss harvesting. For individuals, a financial advisor performs the same service. 

Tax-loss harvesting involves selling assets that are down from the price you purchased them. Thereby booking a loss. 

The loss is used to offset gains in other parts of your portfolio, reducing your tax bill.  

Booked losses can typically be carried forward into future years if your existing losses for the year exceed your gains. 

Depending on whether you are classified as an investor or trader will determine your tax status and treatment of losses for tax purposes. You can review our guide for some simple definitions.

The concept of tax loss harvesting is valuable enough that Wealthfront built an entire business around helping clients do this using AI. 

And even if you don’t have losses to harvest, you can still take advantage of the season. 

All you have to do is think like a hungry grizzly bear. 

Bears, salmon and tax loss selling

I don’t know if you’ve ever seen a salmon run on TV before or not. It’s a big event. Salmon come in from the sea and swim upstream into freshwater rivers. Their journey includes climbing fish ladders and swimming to their traditional spawning areas. It’s the same route to the same rivers year after year. 

This will be their final swim as they lay eggs and will eventually die. 

As they come up river, bears are waiting for them. 

The bears sit in the water or up on the banks of the river and attempt to catch salmon with as little effort as possible. They do this to add as many calories as they can before their winter hibernation. It happens every year at the same time in the same places. 

And this is a lot like tax-loss season. 

Traders with cash are the bears. The salmon are the assets being blown out by portfolio managers to harvest losses. 

In traditional markets, this selling has a relatively noticeable signature. The selling will often be in smaller caps, and it will be indiscriminate. 

The selling will look as if the seller has no interest in price but rather, to get the position off the books ASAP. And the selling will often conclude with a large block trade at the end of the liquidation. 

Nimble traders with cash to deploy can buy these assets at often depressed prices and keep them in hopes of a lift into the end of the year. Recognizing that sometimes it takes a little longer, and on occasion, there will be no lift at all. 

The lift can be part of the year-end market phenomenon called the Santa rally. 

Santa and the markets

The Santa rally is like the offset of tax loss selling. The narrative is that people are happy, blowing off steam at parties, and not thinking about the market as much. 

Lots of the senior traders and portfolio managers will be on vacation, leaving junior traders on the trading desks. 

As a result, trading flows tend to be thin.

These conditions often favor upside moves, although it has to be said there is no guarantee of this outcome. 

Tax-loss selling will take place right up until the end of the year. So while Santa is galivanting through the markets with upside, certain assets will be getting temporarily smoked. 

As crypto continues to mature and gather more traditional players, this activity will become more common there as well. 

And if you’re cashed up and nimble, you might find some projects that are experiencing this same type of selling. These sales may provide you with opportunities for some bargain hunting. 

But as always, you have to apply prudent risk management  and due diligence. In tough markets you have to be more vigilant about trading according to your own strategy and plan. 

And there will be lots of crypto assets that will be getting coal from Santa after the tax-loss season is done. So you will want to choose the tax harvesting positions you take on carefully.  

Capitalize at the end of the year, and get ready for next year

The end of the year has been rich with catalysts

Every two years, you get an American election. There is the annual shopping bonanza of Black Friday and Cyber Monday. 

Hurricanes. Winter storms. And the start of ski season. 

And the lead-up to Christmas can provide important opportunities. 

These include legally reducing your tax bill and or taking advantage of the assets liberated by those that do. 

You can also pick up a few bargains in good crypto names where some selling shows up periodically. And remember, I’m not saying you should do this, but it’s something you can incorporate into your trading strategy. 

Like traditional markets, crypto will take on some seasonality. And these seasonal trends will reflect an increasing presence of traditional market players and various tax and regulatory elements. 

The end of the year is also a great time to reflect on the year that has passed and get ready for next year. 

One of the ways to do that is to look at what you did and what the results were

That way you’ll be ready for the unexpected in the year ahead.



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