This year has been a difficult year in most major markets.

This piece is part of CoinDesk's tax week.

In 2022, as of writing, the S&P 500 is down over 20%, international stocks (as measured by the MSCI International Total Market Index) are down over 24%, the MSCI Emerging Market Index is down 27% and even U.S. government bonds are down 33%, as shown below:

Many growth stocks and large-cap U.S. stocks are down significantly more than these indexes. Some of the largest companies in the world have seen billions of dollars of market cap erased this year. Microsoft is down 34%, Amazon is down 44% and Meta (Facebook) is down a whopping 73%.

While equities and bonds have had very difficult years, cryptocurrencies have also seen significant declines. Bitcoin is down 57% and ether, the native token of Ethereum, is down 59% year to date.

While some investors see these price declines from the positive point of view that it is a buying opportunity for long-term investment strategies, others are looking for more short-term silver linings. That’s where a savvy investor may implement a tax strategy called tax-loss harvesting.

Tax-loss harvesting is a strategy used by investors to lower the amount of tax paid to the U.S. government. To implement a tax-loss harvesting strategy, an investor deliberately sells an investment that has lost value in order to use that loss to offset either capital gains from other assets where they have turned a profit, or in order to offset future gains from either that investment or other profitable trades in the future.

An important detail to note is that tax-loss harvesting is only applicable in taxable accounts – this concept does not work for “qualified” investment accounts like an IRA or 401(k).

Let’s walk through an example of how it works.

Let’s say you have two different investments: a tech stock we’ll call “Investment A” and an energy stock we’ll label “Investment B.” Let’s assume you initially invested $10,000 into both A and B. Now let’s assume that A is down -25% and has a current value of $7,500 while B has gone up 20% and has a value of $12,000.

If you were to sell Investment B, you would have a capital gain of $2,000 and owe capital gains tax on the profit. If you were to sell Investment A, you would have a capital loss of $2,500. If you were to sell both stock A and B, you would have a net loss of $500.

So if you sell both A and B, you will offset the capital gains and avoid paying taxes on that profit while also giving you an additional $500 capital loss, which you can use to either offset other profits on sales that year, ordinary taxable income in the year during which the loss was realized. There is a limit of $3,000 per year you can claim as capital losses in this manner. If you have capital losses over $3,000 in a year, it can be carried forward to future tax years.

This strategy works great if you’re looking to sell your investments. And with traditional stock investments, there is something called the wash-sale rule that prevents you from, say, selling Investment A and then rebuying it within 30 days. If you do, it nullifies that loss. The wash-sale rule in traditional investing means you are not allowed to reinvest back into the same investment or any investment “substantially identical” within the 30-day time span from selling.

But the rule doesn’t apply to cryptocurrency.

Cryptocurrency is not considered a “security” like stocks, bonds and funds, and because it is not a security the wash-sale rule is not applicable as of 2022.

Any investor that has lost value on a crypto position has the ability to sell the investment, capture the capital loss and reinvest back into the same cryptocurrency immediately without violating the wash-sale rule. So let’s say you bought 1 bitcoin when it was at $24,000 but feel confident in its long-term potential and so want to stay invested in it. You can sell that 1 bitcoin at today’s price, which is around $21,000. Then you can immediately re-buy 1 bitcoin at $21,000 and still claim the $3,000 capital loss. Of course this discounts any fees you may need to pay for the buy/sell transactions, but you can see how you can leverage this strategy and still stay long on bitcoin.

Additionally, capital losses in cryptocurrency do not have to be used to eliminate capital gains exclusively in crypto. These losses can be used to decrease tax liability on other asset classes like stocks, bonds, real estate and even $3,000 of earned income.

While it is much more enjoyable to have capital gains on crypto investments, savvy investors can utilize bear markets in order to lower their capital gains tax liability. Understanding the differences between tax-loss harvesting strategies in traditional asset classes and cryptocurrencies provides investors with a unique opportunity to improve the long-term profits of their diversified investment portfolios.

Read More: Crypto Bear Market Opportunities: Make the Most of a Crypto Downturn