In both traditional and crypto markets, there are all sorts of proverbs to help investors navigate through the volatility. You may have heard phrases like “don’t put all your eggs in one basket” or “only invest what you can afford to lose.” While these are certainly nice little reminders, they do little in terms of depth and detailed explanation. That’s where the Barbell Strategy comes in.

The Barbell Strategy, made famous by the author, statistician, and trader Nassim Nicholas Taleb, is a portfolio balancing concept that involves keeping some part of your portfolio in low risk and stable assets while allocating another part to profit from market movements. Today, we’re going to cover the basics of this strategy and how to use it in real life on a platform like YouHodler, which is one of my favorite platforms for crypto lending and borrowing.

The Barbell Strategy: Understanding the Basics

What comes to mind when you first hear the term “barbell strategy?” Most likely, you think of some buff weightlifter in a gym attempting to find the perfect balance for his barbells for a more efficient workout. You’re not necessarily wrong in picturing that image but fortunately, the Barbell Strategy of this article requires no exercise whatsoever.

Much like a barbell in real life, the Barbell Strategy involves finding a perfect balance between assets to ensure you have the most efficient and profitable portfolio possible. On one end, you have investments with low risk and low reward potential. On the other, higher-risk assets with a potentially higher reward.

To use an example from the traditional world of investing, a portfolio using this strategy could consist of higher yield, short-term bonds on one side, and long-term, lower yields on the other.

Let’s see a second example with stocks. In this case, one side of the portfolio would consist of the top 10 stocks on the market while the other side consists of high quality, but low-performing stocks on the other. There is no middle ground here.

The barbell strategy doesn’t have to be a 50/50 split per se. It all depends on the investor’s personal level of risk.  For those that want strong protection against big market swings, then the majority in safe, stable assets is a wise choice, but at the same, time you can miss out on huge opportunities for profit playing with volatility. Again, this part is all up to you and should be taken into consideration before practicing this strategy.

Why would someone want to use the Barbell Strategy?

Are you ready for an unsettling fact? Here we go. No one can predict the markets. That’s right. Even those “expert analysts” and their fancy Fibonacci sequences, “head and shoulder” patterns, etc. are more or less guessing the future based on past behavior. Sometimes they are right but sometimes, they are very wrong.

Hence, it’s more valuable if you spend time learning how to balance your portfolio as opposed to learning how to predict the future. The Barbell Strategy helps you with this. If you learn to design your portfolio in a specific way, then you can protect yourself during bad times and gain heavily during good times. The idea here is that the investments that are low risk can help absorb the bulk of the damage done to preserve your capital while the risker assets can carry you to great profits during bullish markets.

So now that we understand the basics of the barbell strategy in traditional markets, let’s put this philosophy into action using cryptocurrencies and stablecoins.

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Before we start – the usual disclaimer that this should not be taken as tax advice. Always consult a qualified tax lawyer or consultant before you take tax-related financial decisions.

Towards the end of every year, you will come across a lot of talk about tax loss harvesting, especially in the USA, where it is a very popular technique.

This is also true in the crypto space, where tools like Cointracking can help you do tax loss harvesting for your cryptos. What this means is that if you bought Bitcoin and other cryptos when their prices were high and were forced to sell for a loss, there’s a silver lining: these losses could place you in a lower tax bracket. What’s more, claiming those losses is easier than you might assume. Read on to find out everything you need to know about how to file your crypto losses.

So what is tax loss harvesting?

Tax harvesting is basically the sale of non-performing investments so that for tax purposes the resultant realized loss can be set-off against realized capital gains registered during the same year. This is based on the premise that unrealized capital losses cannot be set-off against realized capital gains in one’s tax computation.

E.g. In 2020, Mr Smith sells one BTC at a profit of $10,000 but he also has an unrealized loss on the holding of XMR. Under the tax harvesting strategy, Mr Smith can sell the XMR on the 31^st December (thereby realizing a tax-deductible loss) and re-purchase the same amount of XMR on the 1^st January at basically the same price. This would minimize Mr Smith’s tax liability for the year.

Note that this repurchase can occur on the same date as the sale unless there is any provision in the law against it. You don’t need to wait for the following year to commence.

In practicing tax harvesting one should however be aware of the transaction costs incurred in selling and re-purchasing investments and any tax abuse provisions that tax regimes might have on this sort of practice, e.g. they might not allow as tax-deductible any losses incurred on the sale of investments unless there is a minimum period of say 30 days before any eventual re-purchase of assets in the same class takes place.

In the United States, there are no existing provisions against tax loss harvesting on cryptos, so investors are free to do so. On the other hand, there are provisions against doing so with stocks. So you need to consider carefully the asset in question. For now, cryptos are game.

Filing Your Crypto Taxes 101: How Does it Work?

For the purposes of taxation, the US and most other governments consider cryptocurrencies to be assets. This means that whenever you trade cryptocurrency, the transaction falls into one of two categories: a capital gain or a capital loss.

• Capital gain. A capital gain occurs when you sell cryptocurrency for more than the amount that you paid to purchase it.
• Capital loss. If you sell cryptocurrency for less than the amount that you paid for it, this is considered to be a capital loss.

You have to sell or buy an asset to trigger a taxable gain or loss. Once you decide to make a move, tax authorities consider the loss to be “realized.” If your loss is great enough, you may be able to use it to enter a lower tax bracket.

Deducting Your Crypto Losses

One of the biggest benefits of claiming a loss is that you can offset income gained from other sources.

In the US, the IRS lets you deduct up to $3,000 worth of net capital losses each year from the amount of money you’ve earned at your day job. If the amount you lost was greater than $3,000, you can get another deduction of up to $3,000 when you file your taxes next year.

If you currently make just over $50,000 per year at your job, that $3,000 cryptocurrency loss could place you in a lower tax bracket. This could result in significant tax savings.

What’s more, if you’ve earned some income through stocks or through the sale of property, there’s no limit to the amount you can deduct from those revenues.

Here’s Where It Gets Complicated…

Figuring out how much you’ve made or lost can be a headache, particularly if you haven’t been keeping track of your purchases or if you placed a huge amount of trade orders last year. Fortunately, there is software available that can crunch all your crypto tax data for you.

The tool depicted below, called CoinTracking.info, can import your transactions from all your cryptocurrency wallets and exchanges. The interface walks you through how to do the imports.

At the end of the import process, you can download IRS form 8949. This is the form you need to submit to report your loss.

Other download options include CSV, TaxACT and TurboTax.

Conclusion

If you lost money in crypto markets, you may be able to offset some– or perhaps even all– of those losses at tax time. Reporting your capital losses might help you move to a lower tax bracket. If your deductions qualify you for a lower bracket, filing them could save you thousands of dollars when you submit. Visit CoinTracking.info for more information.

There are of course other software alternatives to CoinTracking, although the latter is one of the earliest and most reliable ones. Read my article about crypto tax preparation tools for more information.