The Complete Guide to Crypto Tax Loss Harvesting
Save money on your crypto taxes with tax loss harvesting. Learn how to strategically identify what crypto you can claim losses on in order to reduce your tax bill
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This article is part of TokenTax's Cryptocurrency Tax Guide.
Tax loss harvesting is a tax strategy where you strategically sell off crypto that you hold at a loss to lower your capital gains. Smart investors will trigger certain capital losses, often near the end of the year, to save money on their taxes. We’re making it possible for every crypto investor to do the same.
Recall that crypto is treated as a capital asset. You only recognize gain or loss on an asset when you sell it, trade it, or spend it. This means that you could be holding crypto at an unrealized loss.
Realizing these unrealized losses in a strategic manner to subject from your capital gains is called tax loss harvesting. 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, like stocks.
Imagine you have $5,000 in capital gains for the tax year. But you also have some ETH that you hold at a total of $2,500 in losses.
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 how advantageous harvesting is considering short / long term status of cryptocurrencies. You can sell off assets so that you amount out to $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 2019 TokenTax account, you can automatically import all of your crypto data and access your own tax loss harvesting dashboard to see what your unrealized losses are.
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, making it super easy to get a birds-eye view of your tax loss harvesting opportunities.
The bonus of doing tax loss harvesting with a 2019 plan is that you’ll have all your data completely imported for 2019. This means that when it’s time to put together your tax return next year, all you need to do in TokenTax is to export your Form 8949.
Tax loss harvesting is simple for traditional assets like stocks, where you 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 where you can have countless different cost bases and holding periods due to trading activity.
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 crypto. For example, you could have 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, you want to be sure that you don’t report a sale of the tax lot with the $4,000 realized gain on your taxes.
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 via 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, you may have unrealized losses in BTC, some for short term holdings, and some for long term holdings. You want to harvest losses for the short term holdings and possibly keep the long term holdings, so that if those holdings become unrealized gains because of the price going back up, you’ll possibly be able to pay the lower long term capital gains tax on that BTC once you do sell it.
This is another situation that our accounting team can help with. VIP customers can get one on one help from an accountant to decide how to harvest losses considering short and long term.
It’s entirely allowed to harvest your losses at the end of the year. Note that if you buy back your assets immediately, you are technically doing 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 applies for if their spouse or company under their control purchases the same or substantially similar security within this 30 days. This rule is in place to prevent taxpayers from easily claiming losses on securities to maximize their tax losses.
The IRS has not clarified whether crypto falls under the purview of the wash sale rule. That means we don’t know whether the 30 day rule applies to crypto, or what cryptocurrencies may count as substantially similar.
To be safe, some traders elect to wait 30 days before buying back into crypto after recognizing a loss. It’s hard to say whether the IRS will in the future specifically apply the wash sale trading rule to crypto. In the past year, the SEC began to focus on regulating ICOs as securities.