The Complete Guide to Crypto Tax Loss Harvesting
Strategically identifying unrealized losses to sell can help you lower your capital gains taxes. Learn more.
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This article is part of Cryptocurrency Tax Guide.
Tax loss harvesting is a strategy in which you sell crypto held at a loss in order to lower your amount of reported capital gains. Smart investors will typically do this near the end of the year in order to save money on their taxes. With TokentTax, you can easily adopt this strategy using our tax loss harvesting dashboard.
Recall that crypto is treated as a capital asset, like property or stocks. You only recognize gain or loss on a capital asset when you sell it, trade it, or spend it. This means that if you are holding crypto that has lost value, you have not realized that 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 deduct more from your income or offset gains in other assets, 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, thus cutting your crypto tax liability in half.
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!
You can harvest as much or as little of your losses you’d like, depending on the strategy you and your crypto tax advisor have devised. 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.
With a TokenTax account, 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 ad how much of an unrealized loss or gain you have on each cryptocurrency. This allows you to get a birds-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 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.
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.
Luckily, the TokenTax team is here to assist. We do one on one sessions with our VIP clients to help them harvest their losses even for notably complex crypto accounting situations.
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.
For our VIP customers, we do one-on-one sessions with an accountant to help you sell the right amount of crypto to claim the right amount of capital loss. Then, we use specific share accounting to ensure the correct cost basis is used for the sale so that you realize a loss on the right tax lot.
Keep in mind that short-term and long-term gains are taxed at different rates; long-term capital gains are taxed at a favorable lower rate in the U.S. and in certain other jurisdictions.
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 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 our accounting team can help.
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 wash sale.
The IRS’s wash sale rule states that a taxpayer cannot claim a loss on a sale or trade of a security if they buy back the security (or a substantially similar security) within 30 days. The same restriction applies to the purchases of their spouse or a company under their control.
The IRS has not clarified whether the wash sale rule applies to cryptocurrency. That means we don’t know whether the 30 day rule applies to crypto, or what cryptocurrencies may count as substantially similar. However, recently proposed legislation aims to expliticly ban wash sales of crypto assets in the United States.