If you’ve ever invested in crypto, then you know seeing the market plummet before your eyes can be a harsh reality. With so much volatility, crypto tax-loss harvesting can be a silver lining that helps save thousands of dollars when it comes time to pay Uncle Sam.
Crypto tax-loss harvesting focuses on using your asset’s realized losses to offset capital gains, therefore cutting your tax bill.
Most investors begin to harvest towards the end of the year, during market dips, or when losses are at an all-time high.
In this blog, we’ll break down what crypto tax-loss harvesting is, how it works, and what you need to know and tax-loss harvesting rules to help you reduce your next tax bill.
What is Crypto Tax-Loss Harvesting?
Crypto tax-loss harvesting is a tax-saving strategy crypto investors can utilize to lower capital gains while reducing their tax bill for the fiscal year.
In the eyes of the IRS cryptocurrency or digital assets are treated as capital assets, like stocks and real estate. Any time you sell, trade, spend, or gift crypto, the IRS recognizes it as a capital gain or loss.
Tax-loss harvesting refers to selling crypto you’re holding that has seen a drop in the market price. A realized loss occurs when an asset is sold at a lower price than it was when initially purchased.
At the end of the year, if total capital gains and losses combine for a negative number, a net capital loss occurs.
This allows you to offset up to $3,000 of your ordinary income ($1,500 if married and filing separately).
Net capital losses can carry over and be used to offset capital gains for future tax years. There is no limit to the number of years investors can take advantage of capital loss carryover.
Cryptocurrency Wash Sale
A popular strategy among crypto investors is to sell assets to realize the loss, then buy them back within 30 days. This method is known as a wash sale.
The IRS ‘wash rule’ is designed to prevent investors from using this strategy to realize losses on stocks and securities, but the IRS wash sale rule does not cover digital assets.
Currently, cryptocurrency is considered property and not a security, meaning the wash rule does not apply. This could potentially change in the future as crypto legislation continues to develop.
When Should I Tax-Loss Harvest?
Most crypto investors prefer to wait until the last month of the tax year to harvest their losses.
Although this is the most common strategy, we recommend taking advantage of crypto tax loss harvesting over the course of the year.
Since cryptocurrency can be so volatile, investors may have multiple chances during the year to take advantage of drastic price dips and relieve some stress during the end of tax season.
The hardest part for crypto investors is identifying which coin has the highest cost basis in comparison to the current market value price.
Who Can Benefit from Crypto Tax-Loss Harvesting?
Any crypto investor can take advantage of the tax-loss harvesting strategy, but it may not be as fiscally fruitful for everyone.
Crypto tax-loss harvesting aims to save money on your tax bill but primarily helps investors in higher tax brackets.
If you’re single and make under $40,000 a year or married and make less than $80,000 a year, your long-term capital gains tax rate is already 0%. If this is you, crypto tax-loss harvesting may not actually save you any tax.
If you plan to sell any cryptocurrency you’ve recently bought within the past year, it will be subject to short-term capital gains rates (10-37%) rather than long-term capital gains (0-20%) which would apply if the crypto was held for longer than a year.
To learn more about short term and long term capital gains, check out our Crypto Tax Guide.
Tax-Loss Harvesting Strategies for NFT Investors
NFTs create excellent opportunities to use tax-loss harvesting strategies. Especially for NFT projects that may have been abandoned by the creators and become worthless, selling your NFTs to harvest the losses is a smart move to consider.
However, what can you do when there are no buyers for your NFTs?
Unsellable NFTs will buy your worthless NFTs for a penny through their verified and audited smart contract so that you can realize your capital losses. They allow instant sales of up to 500 NFTs at a time to help keep gas fees minimal, especially in comparison to the realized losses that are likely to result in write offs and lowered tax burdens.
Be sure to avoid selling to yourself or to people in your social circle, either of which may jeopardize your ability to legally claim your losses; look for buyers that have been audited and verified; and, ideally, talk to your tax professional to optimize your tax-loss harvesting strategy!
Read our NFT Tax Guide to learn more.
Want to Save on Your Next Tax Bill? We Can Help!
If you’re reading this at the end of the year, tax losses need to be claimed by Dec. 31st.
Tracking your yearly crypto transactions can be tedious and before you miss out on any potential tax savings, we recommend consulting with an experienced tax attorney before New Year’s Day.