Crypto Tax Loss Harvesting: Your Guide for 2022
Strategically identifying unrealized losses to sell can help you lower your capital gains taxes. Learn more about crypto tax loss harvesting.
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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 is a strategy in which you sell an investment held at a loss in order to lower your amount of reported capital gains. To lower their tax bill, smart investors will typically do this near the end of the year or during market dips. With TokenTax's crypto tax calculator, you can easily adopt this strategy using our tax loss harvesting dashboard.
How crypto tax loss harvesting works
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.
Tax loss 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.
Imagine you have $5,000 in capital gains for the tax year. But 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 that ETH, then you will be liable for tax on $5,000 in capital gains. But if you harvest your ETH losses by selling the ETH to claim those $2,500 in losses, then your total capital gains will be reduced to $2,500, cutting your crypto tax liability in half.
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.
Reporting 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.
Getting started with crypto tax loss harvesting
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?
You can have unrealized gains and losses for a single cryptocurrency.
For example, let's say you bought 1 BTC at $4,000 and 1 BTC at $10,000. If BTC is now trading at $8,000, then you have a $2,000 unrealized loss and a $4,000 realized gain. If you plan to harvest that $2,000 loss, be sure that you don’t report it as a sale of the tax lot with $4,000 of realized gains.
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.
This is another situation with which the TokenTax accounting team can help.
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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