March 22, 2022

Crypto Tax-loss Harvesting: The complete guide to reducing your crypto taxes

Written by Mark Kang, CPA Updated March 22, 2022

What is tax-loss harvesting?

Tax-loss harvesting is an investing strategy where you sell any investments at a loss to offset your other capital gains. Consequently, you can reduce your capital gain tax. This concept might be familiar for the stock investors here, but many of us who just dove into the crypto world may find this confusing.
So, let’s find out how to “harvest” tax loss in your crypto transactions that could reduce your crypto taxes.

 

How does crypto tax-loss harvesting work? 

What would you do if the price of your cryptocurrency is sinking like the Titanic? 

You might want to hold onto it until it recovers its value, but if you decide to sell your crypto and recognize the loss, this is when you “harvest” the loss.

Because the loss you took can be used to offset your capital gains from other investments, you end up reducing or even possibly eliminating your capital gains tax. This is tax-loss harvesting. 

 

Here is an example of crypto tax-loss harvesting.

Victor bought 1 ETH for $ 4,000 and 5,000 DOGE for $500. 3 months later, the value of 1 ETH dropped to $3,500 while 5,000 DOGE rose to $1,000.

 

Option 1: Victor sold 1 ETH at a loss

3,500 (sales price) - 4,000 (cost basis) = -$500 Loss

If there are no other capital gains to offset, he can deduct $500 from his income.


 

Option 2: Victor sold both 1 ETH and 5,000 DOGE.

3,500 (sales price) - 4,000 (cost basis) = -$500 Loss
1,000 (sale price) - 500 (cost basis)= $500 Gain

The $500 loss from the sale of ETH offsets the $500 gain from the sale of DOGE. So Victor doesn't owe any tax on his crypto transactions.

If you still have a loss remaining after offsetting your capital gains, you can deduct up to $3,000 of your loss ($1,500 if married, filing separately) from your total income. Whatever loss is left on top of that, can be carried forward to the next tax year until there are no losses left. 


4 things you should know before harvesting your loss

 

1. Be careful of the wash sale

A proposal to apply the wash sale rule to cryptocurrency may take effect in 2022. If this rule takes effect, you cannot deduct a loss from the sale of crypto if you repurchase the same crypto within 30 days before or after the sale. 
 

2. Harvest your losses year-round

You don’t have to wait until the end of the year to harvest your losses. If the value of your cryptocurrency keeps sinking and your hopes are sinking about as quickly, you can simply sell crypto at any time of the year. 
 

3. Offsetting your short-term gains comes first

Short-term capital gain tax rates (10% —37%) are higher than long-term capital gain tax rates (0%, 15%, 20%). If you have both short-term and long-term crypto capital gains, it is better to sell property that generates a short-term capital loss to offset the short-term gain.
 

4. Don’t ignore exchange fees

Keep in mind that the trading fees from crypto exchange platforms can add up even though they can be as low as 0.5%. This means that your “tax saving” strategy may end up a failed one, because of the fees you had to pay in every transaction. It is important to check your exchange fees before vigorous crypto trading.


Is there a deadline for tax-loss harvesting?

You have to finish tax-loss harvesting by December 31, 2021 to claim your losses for this tax year. Make sure you are not confused between the tax return due date (April 15, 2022) and the tax year period (January 1, 2021— December 31, 2021).

 

Wrapping up

Many crypto investors are already using crypto tax software to save their time and taxes. It is because it is much more accurate and efficient to figure out short-term or long-term crypto transactions and calculate the net crypto gain and loss to offset when you utilize crypto tax software. Check out Cointelli’s homepage and start saving your taxes.
 

DISCLAIMER: This post is for informational purposes only and should not be interpreted or relied upon as a substitute for the advice of financial, legal, or tax professionals. This content also only addresses U.S. federal income tax consequences for U.S. citizens and residents and does not address tax consequences that may be relevant to a particular person subject to special rules, such as dealers or traders. You should consult with your own financial, legal, or tax professionals to report and file your crypto taxes or make decisions on your particular circumstances. The laws, regulations, or interpretation of the existing laws could change, which may adversely affect either prospectively or retroactively. The content of this post is subject to changes.
About the Author
Mark Kang, CPA
CEO & Co-founder of Cointelli
Mark Kang is a CPA with a Ph.D. in Physics. He helped build Cointelli’s foolproof formula for accurate crypto tax reporting. Passionate about crypto tax topics, Mark is here to share the knowledge.

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About the Author
Mark Kang, CPA
CEO & Co-founder of Cointelli
Mark Kang is a CPA with a Ph.D. in Physics. He helped build Cointelli’s foolproof formula for accurate crypto tax reporting. Passionate about crypto tax topics, Mark is here to share the knowledge.
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