You may not be in control of the markets, but you are absolutely in control of how you handle your crypto portfolio. While losing money is never the goal, cryptocurrency losses can offset a significant amount of your funds for the entire year.
In this article, we’ll help you understand everything you need to know about cryptocurrency tax loss harvesting. We’ll discuss how it works and share a simple guide to help you get started saving money on your tax return today.
Defining Crypto Tax Loss Harvesting
Crypto Tax Loss Harvesting is an investment strategy that helps reduce your net capital gains and, in turn, reduces your tax bill for the financial year. Here’s how crypto tax loss harvesting works.
If an investor bought $10,000 of a crypto token in April 2022 and was holding the same investment at $7,000 in December, that represents a 30% unrealized loss. By selling the investment at a $3,000 loss, they could use that $3,000 to offset other taxes owed from the financial year. The loss could also be carried forward to the next tax year. Capital losses taken in cryptocurrency do not have to be used solely for harvesting in crypto assets. Losses can be used to decrease the tax liability on other asset classes, such as stocks, bonds, and real estate.
How to reduce your crypto tax bill?
Crypto is treated as a capital asset, like property or stocks. You only realize a crypto capital gain or loss when you sell it, trade it, or spend it. This means that if you are holding an asset that has lost value, you have not yet realized this crypto loss.
Reporting crypto capital losses on your return has tax benefits. If you have a total capital loss in crypto, you can use that loss to offset gains in other capital assets, like stocks. Otherwise, you can carry forward that capital loss to deduct from future capital gains, whether in crypto or in other asset classes.
This means that you can still benefit from harvesting losses if you don’t have capital gains to offset that same year; there is no expiration date on losses you carry forward to offset future gains or income. Tax harvesting is often used to offset capital gains, but, even if you don’t have gains, you may still want to harvest losses so that you can lower your taxable income or offset gains associated with other asset types.
When should Crypto Tax Loss Harvesting be done?
Anytime that the market value of your asset drops beneath its cost basis, there is an opportunity to tax loss harvest and effectively save money on your next crypto tax bill.
There are a few simple steps to tax loss harvest your cryptocurrency:
1. Identify the crypto assets you hold at a harvestable loss.
2. Sell the entire amount of that asset (can be for fiat, a stablecoin, or any other cryptocurrency).
3. Assuming you would like to maintain the same composition of your portfolio as before, repurchase the same amount of the asset.
4. Transfer your assets back to the wallets in which you would like to hold your assets long term.
Beware crypto wash sales
When investors choose to buy the asset back at the lower price — this is because many tax offices have very specific rules to try and stop investors from pursuing artificial losses.
For example, if you had a large Capital Gains Tax bill looming — you could quickly look through your unrealized losses to figure out how many crypto assets you need to sell, sell these to create a realized loss and then buy them all back immediately at the lower price before the market changes again. You don’t really have a loss as you’ve reinvested proceeds into the same asset — so you’ve got the same assets you always did. But you do have an artificial loss you can use to reduce your tax bill. This is known as a wash sale.
This is very easily exploited, so tax offices have put in stringent rules to try and stop investors from creating artificial losses through a wash sale. This is a rule that generally stops investors from claiming a capital loss from cryptocurrencies that were sold and repurchased in a short period of time.
Each country calls this something slightly different — in America and Australia it’s known as the wash sale rule, in Canada it’s known as the Superficial Loss Rule, while in the UK it’s known as the Same Day and Bed and Breakfast Rule.
Disclaimer
**The details contained in this article are for informational purposes only and are of a general nature. Nothing contained in this article constitutes tax, legal, financial, or investment advice nor is it not intended as a recommendation for buying, trading, or selling crypto assets. References to any securities or digital assets are for illustrative purposes only. Crypto assets are volatile. You should be fully aware of the level of risk involved before engaging in crypto-related activities. Please educate yourself to make informed decisions. It is recommended to seek independent advice from reliable and qualified experts before engaging in such activities and on your tax affairs. Any loss of data, crypto assets, or profit is your sole responsibility. Ledger is not responsible for the consequences of reliance upon any opinion or statement contained herein or for any omission.
