The Essential Guide to Crypto Tax Loss Harvesting
At year’s end, or during market dips, crypto tax harvesting can help you use losses to lower your taxes.
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Key Takeaways
Tax loss harvesting is a strategy in which investors sell assets at a loss in order to offset other capital gains, lowering their tax liability.
Many investors do this at the end of the tax year or during market dips.
If you tax loss harvest and buy back the same asset within 30 days, this is a wash sale. Currently, the rule against wash sales does not apply to crypto, but closing this loophole is on the legislative agenda.
Crypto tax loss harvesting involves realizing losses on assets in order to use those losses to offset your capital gains, thereby lowering your tax burden. Investors typically tax harvest near the end of the year, when they can approximate their total gains, or during market dips, when losses are highest.
TokenTax's tax loss harvesting dashboard automatically identifies unrealized losses in your portfolio, making it easy to find opportunities to reduce your capital gains taxes.
How to tax loss harvest crypto
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 a 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. When filing your return, you can deduct up to $3,000 from your income. Otherwise, you can carry forward that capital loss to deduct from future capital gains, whether in crypto or in other asset classes.
Tax harvesting is often used to offset capital gains, but even if you don’t have gains, you may still want to harvest further losses so that you can lower your taxable income or offset gains among other asset types, such as stocks.
Tax loss harvesting example
You have $5,000 in capital gains for the tax year.
You also have some ETH that is worth $2,500 less than what you paid for it over a year ago.
If you don't sell the ETH you will have $5,000 of taxable gains.
If you harvest your losses and sell the ETH, you will only have $2,500 of capital gains.
When should I tax loss harvest?
You need to harvest your losses during the tax year. Once the tax year is over, your gains and losses are locked in. Most people thus elect to harvest their losses in the last month of the tax year. If you’re a U.S. taxpayer reading this in December, that means it’s time to act now!
Market dips are another popular time to harvest losses, since lower asset prices result in larger losses, and consequently, more gains that can be offset.
How much of my losses should I harvest?
You can harvest as much or as little of your losses you’d like, depending on the strategy you and your crypto tax advisor develop. For example, you could sell off assets so that you have $0 in capital gains, or you can sell enough so that you have an overall capital loss.
Getting started with crypto tax loss harvesting
With our crypto tax software, you can automatically import all of your crypto data and access your own tax loss harvesting dashboard to find unrealized losses.
Our tax loss harvesting tool uses your crypto transaction history to calculate exactly how much of each coin you hold and how much of an unrealized loss or gain you have on each cryptocurrency. This allows you to get a bird's-eye view of your tax loss harvesting opportunities.
The bonus of doing tax loss harvesting with a TokenTax plan is that you’ll have all your data completely imported by the end of the tax year. This means that when it’s time to put together your tax return next year, all you need to do is export your Form 8949.
Advanced crypto tax loss harvesting topics
Tax loss harvesting can be simple for traditional assets like stocks, which likely don’t have many varying cost bases and holding periods. With crypto, it can get a little more complex, particularly for major coins like BTC and ETH for which you can have countless different cost bases and holding periods.
What if I have unrealized losses and gains for a single cryptocurrency?
If you have unrealized gains and losses for a single cryptocurrency, it's important that you're careful when documenting your tax lots so you don't inadvertently report gains instead of losses.
Tax loss harvesting with unrealized gains and losses of the same crypto
You bought 1 BTC at $4,000 and 1 BTC at $10,000.
BTC is now trading at $8,000, so you have a $2,000 unrealized loss and a $4,000 unrealized gain. Your total capital gains for the year are $20,000.
You plan to harvest the $2,000 loss. If you sell the right tax lot, you will reduce your capital gains total by $2,000 to $18,000.
However, if you sell the tax lot acquired at $10,000, you will increase your capital gains total by $4,000 to $24,000.
One-on-one sessions with a crypto tax accountant can help you use specific ID accounting to identify the right crypto lots to sell to claim the right amount of capital loss.
How do I handle short-term and long-term gains when tax loss harvesting?
Keep in mind that there are different crypto tax rates for long-term and short-term trades; long-term capital gains are taxed at a favorable lower rate in the U.S.
For example, let's say you have unrealized losses in ETH. Some losses are in short-term holdings, and some are in long-term holdings. Your crypto tax advisor may suggest that you harvest losses on the short-term holdings rather than the long-term holdings, so that if ETH prices increase in the future, you will be able to pay the lower long-term capital gains tax rate once you do sell it for a profit.
How do I tax loss harvest NFTs?
In theory, you can tax loss harvest NFTs just like you would a fungible token. However, the process can come with extra challenges, such as difficulty estimating fair market values or struggling to realize a loss on a worthless asset. Fore more on the subject, read our Intro to NFT Tax Loss Harvesting.
What are the risks of tax loss harvesting?
It’s entirely legal to harvest your losses at the end of the year. However, if you buy back your assets immediately, you are completing a crypto wash sale.
Currently, crypto assets are not technically covered by the wash sale rule, which only applies to securities. However, multiple pieces of proposed legislation have aimed to ban crypto wash sales. Although none have been passed, investors should be aware that the issue is on the legislative agenda and check with their crypto tax advisors before engaging in wash sales.
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