- Crypto tax-loss harvesting is a strategy for reducing tax bills on cryptocurrencies.
- It helps to gain profits for long-term investors.
- It is not applicable in every country. For example, the United Kingdom
Crypto tax-loss harvesting is a strategy to reduce the tax bill and even helps to create a capital loss by selling cryptocurrency. It is beneficial for long-term investments and minimizes the tax burden for investors. It has risks and limitations as well, which should be considered by investors before using this strategy.
What Is Crypto Tax-Loss Harvesting?
It is a strategy to reduce the tax bill for the financial year. The strategy involved selling cryptocurrency at a loss to create a capital loss. Then these losses can be used to offset capital gains from other investments. The safest way to use this strategy is to first wait 30 days between the time of sales and the purchase. This is known as the “wash rule”.
It is not beneficial for short-term investors; however, long-term investors can make capital gains through the strategy. In the United States, the Internal Revenue Service (IRS) has tax-loss harvesting rules. However, the UK doesn’t have a specific wash rule for crypto investments.
The following steps need to be followed to understand how to use tax-loss harvesting in crypto:
- Identify Cryptocurrencies Whose Price Is Declining: Identify any cryptocurrencies by looking through portfolios.
- Determine the Capital Loss: The difference between the purchase price and the sale price of the cryptocurrency should be calculated.
- Offset Capital Gains: This will reduce the overall tax liability.
- Timing: It is a very important factor in the strategy, as we can offset capital gains from the same tax year or carry the losses forward to the next tax year.
- Keep Records: The transaction-related records related to the tax-loss harvesting strategy should be kept to provide them to tax authorities.
Benefits and Risks of Crypto Tax-Loss Harvesting
The major advantage of crypto tax-loss harvesting is that it reduces crypto tax bills. Investors that lose value in a crypto position have the ability to sell the investment, capture the capital loss, and reinvest back into the same cryptocurrency immediately without violating the wash-sale rule. These capital losses in cryptocurrency can be used to decrease tax liability on other asset classes like bonds, real estate, stocks, and even earned income.
The risks related to tax-loss harvesting in crypto are wash-sale rules, market fluctuations, short-term vs. long-term gains, lack of knowledge, and complexity.
There are several ways to reduce crypto tax bills other than tax-loss harvesting, such as holding periods, using tax-advantaged accounts, tax deferral, and charitable donations.
Conclusion
Many investors are unaware of the crypto tax-loss harvesting strategy that can help them minimize losses and lower their tax bills. Investors can use crypto investment losses to offset capital gains in other asset classes, such as stocks. They can use them to offset up to $3,000 per year in ordinary income.
