Disclaimer: The following advice and guidance have been provided to help individuals, businesses or investors by providing them with information. This post was not written by a Certified Public Accountant. For proper and official tax, accounting or legal advice, please contact a certified professional.
Cryptocurrencies continue their dominant rise in popularity, even as the price of BTC and ETH reach new lows, there is no denying the progress the digital currency market endured. Crypto accounting and tax are becoming more critical for businesses and investors as new regulations from government and tax authorities outline the first guidelines & tax obligations in 2019.
Crypto holders, investors and businesses alike are all discovering new ways to track, manage, calculate cost basis and cut costs for their crypto taxes and accounting. One traditional tax strategy, tax-loss harvesting, is already serving the needs for the crypto ecosystem by helping to reduce tax liabilities.
Defining tax harvesting for crypto
This term is a strategy often used to offset and reduce investment losses regardless of financial instruments. When a crypto investor chooses to sell an underperforming asset at a loss, to offset realized capital gains, ultimately decreasing the final tax obligation.
“Tax loss harvesting” is a strategy that can help you reduce investment losses. Since crypto is treated as “property” under the IRS guidelines, this means the same capital gains rules apply. Therefore, any crypto losses can be used to offset gains on other investments you traded, such as stocks, bonds and other assets in a portfolio.
To make it understandable…
If an investor purchases 1 bitcoin in June ($100 USD), holds it for one year, then trades it for ethereum (10ETH x $500 USD), that 1 bitcoin is taxed 20%, the standard long term tax rate. Once the investor holds their newly traded ethereum tokens for one year, those assets are also taxed 20%.
The purchase of bitcoin is then traded for ethereum, yielding a profit of $4,950. But, the investor then sells 10 ethereum, each valued at $100USD, producing a loss of -$4000. When calculating the total amount of gains/losses and their long-term tax rate, the investor saved $190 by harvesting the loss.
Who does it apply to?
Anyone that owns crypto or any financial instruments, such as stocks or securities can leverage the value of tax loss harvesting. Crypto investors can leverage their underwater crypto losses and apply it to other gains from their stock portfolio, reducing the individual’s annual tax bill. Moreover, they can use approximately $3,000USD in capital losses towards earned income.
*FINAL DEADLINE TO SUBMIT RELEVANT TRADES IS BEFORE DECEMBER 31*
Important things to keep in mind
Short-Term vs Long-Term: There are short-term and long-term percentages to be paid on crypto investments held for more or less than one year. Because they are taxed differently, short-term losses will be deducted against short-term gains, and same for long-term gains/losses. It is also normal to see higher short-term gain rates, which can sometimes provide more value when offsetting.
Applicable to many financial instruments: Tax gains/losses for harvesting can be for all financial instruments, including stocks, bonds, crypto and securities.
Repurchasing sold losses: When harvesting tax losses for traditional securities (stocks, bonds), the investor must wait 30 days before repurchasing the same or almost-identical security to the one sold to produce a realized loss. If purchased before, this is regarded as a “wash” and is not applicable for claiming a capital loss.
In the U.S, BTC is not a security, therefore selling BTC to take on a capital loss can be repurchased immediately after selling it.
While BTC may have its own rules, other cryptocurrencies may be different. It is always recommended to confer with a professional before committing to a sale or trade.
Please note: If an individual repurchases a financial asset (BTC), they automatically reset the tax clock on the purchase. This means the individual needs to wait 12-months before applying long-term tax gains on their next sale. Tax harvesting can still be applied to cryptocurrency regarded as securities, only if the individual waits the full one-month period before repurchasing.