You may have seen it already in our 2020 Crypto Tax Guide but for most people, the largest personal expense they have is not their rent, housing, car payment, or food. It’s their tax bill.
Tax loss harvesting is a compelling form of tax planning that allows people to offset their tax expenses by selling assets at a loss before the end of the calendar year. When it comes to cryptocurrency, it’s a low-effort way to sometimes save tens of thousands of dollars in under an hour, all while maintaining your existing portfolio.
How Does Crypto Tax Loss Harvesting Work?
Let’s say earlier this year, Max saw the price of bitcoin climbing. He purchased 1 bitcoin (BTC) near the top of the market at $13,000 in June. Seven months later, BTC is trading at $7,000, so Max now has the opportunity to tax loss harvest $6,000 worth of unrealized capital losses.
Here’s how it works:
- Cost basis: $13,000 (price Max bought his bitcoin)
- Fair market value: $7,000 (current price of Max’s bitcoin)
- Harvestable losses: $6,000 (difference between the two)
To harvest the losses, Max needs to dispose of his bitcoin before the end of the tax year (December 31 in the US). CoinTracker makes keeping track of this easy with our new, free Tax Loss Harvesting Tool, which tells users which assets they can tax loss harvest and estimates how much they can save:
CoinTracker Tax Loss Harvesting dashboard surfacing $93K+ of tax savings!
When You Can Tax Loss Harvest Cryptocurrency
Anytime that the market value of your asset drops beneath its cost basis, there is an opportunity to tax loss harvest and effectively save money on your next tax bill. CoinTracker makes this easy for you on the Dashboard by visualizing your assets; anytime the red dotted line (cost basis) is above the blue solid line (market value) you have an opportunity to tax loss harvest. In the image below this period is accented in purple for visibility.
CoinTracker Dashboard displaying cost basis and market value of assets
There are five simple steps to tax loss harvest your cryptocurrency:
- Identify the crypto assets you hold at a harvestable loss (available on the CoinTracker tax loss harvesting dashboard)
- Sell the entire amount of the asset (can be for fiat, a stablecoin, or any other coin)
- Assuming you'd like to maintain the same composition of your portfolio as before, repurchase the same amount of the asset
- Transfer your assets back to the wallets in which you'd like to hold your assets long term
- Sync your CoinTracker dashboard from the wallets page
Wash Sales and Cryptocurrency
In the U.S. the IRS has a wash sale rule for securities. It doesn't apply to Bitcoin since it's not a security, but may apply to other crypto assets that the SEC deems securities. To be extra safe, you can avoid purchasing back the same asset for 30 days)
In plain ol’ English, when you tax loss harvest stocks, you have to wait 30 days to re-purchase anything you sold (in order to claim the loss on your taxes), but this does not apply to any cryptocurrencies that are not securities, such as Bitcoin and Ethereum. This means that you can sell your crypto and instantly buy it back, maintaining the same position you had before while claiming a tax loss. That’s a win-win.
Note: Tax Loss Harvesting must be done before the end of the tax year, which in the United States is December 31. Individual tax lots within a particular coin can have different cost bases, so please ensure you are considering the taxable implications of each trade before executing it. If you are unsure, you can manually add the trade in CoinTracker to see what happens before you actually make the trade.
Let us know about your experiences tax loss harvesting your cryptocurrency @CoinTracker.
Disclaimer: this post is informational only and is not meant as tax advice. For tax advice please speak with a tax professional.