Save Money on Taxes with Tax Loss Harvesting
Crypto losses: There's a silver lining
It’s no secret that cryptocurrency is a volatile market. As a result, you may be holding crypto at a loss. However, smart crypto investors will sell off these assets at a loss near the end of the tax year in order to reduce their capital gains taxes.
Recall that crypto is treated as a capital asset and that capital losses offset your capital gains. You only recognize gain or loss on an asset when you have a taxable event.
You may have unrealized losses, meaning crypto held at a loss that you haven’t traded or sold yet. If you don’t realize losses (i.e. sell or trade that crypto), then those losses won’t offset gains during that tax year.
Another tax benefit of harvesting your losses is that you can offset gains in other capital assets. If you have a net capital loss on crypto, those losses can offset capital gains from other assets like stocks.
The bonus perk of doing tax loss harvesting with TokenTax: you’ll be ready to use the same data to seamlessly export your tax forms and file your crypto taxes when tax season rolls around.
The TokenTax Tax Loss Harvesting tool
Our tax loss harvesting tool can be used to strategically claim losses on your crypto. It helps you minimize your tax liability by clearly showing your positions where you have a capital loss, separate from all other positions. Using your crypto transaction history, it knows how much you paid for all of the assets you hold and what your current unrealized gain or loss is on an asset.
Assets at a loss are separated from assets at a gain, so you have an overview of what your overall unrealized gain/loss situation looks like.
You only have one chance to sell the right asset to minimize your losses. If you sell crypto that was actually an unrealized gain, then you can’t reverse that trade. With the tax loss harvesting dashboard, you can be confident that the asset you sell will reduce your tax liability.
When should I do tax loss harvesting?
Remember that, in order to claim losses for a tax year, you need to do so within the tax year. Most people elect to harvest their crypto losses near the end of the tax year. For U.S. filers, this is in December.
Wash sale rules for capital losses
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.
TokenTax does the work so you don’t have to.
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