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.
There is tremendous value in understanding realized and unrealized gains or losses when it comes to managing crypto assets for accounting or tax purposes. It can lead investors and businesses to either pay exceptionally high taxes or find new ways to harvest tax losses. Similar to traditional accounting or finance management, realized vs unrealized gains have important rules to follow in order to leverage them towards reducing capital gains taxes.
With crypto accounting, taxation and management becoming more important for investors and businesses to take advantage of, Blox wants to ensure they are better informed and empowered with knowledge and the best tools to assist them along the way.
How to understand what is realized vs unrealized gains.
It is imperative to note that gains on crypto can only be realized once an asset is sold or exchanged. Meaning, if an investor buys one Bitcoin and holds it for a long period of time, they have not yet realized any of the possible gains or losses for that asset.
If the same investor buys one Bitcoin and sells it for a profit, they are required to pay the capital gains tax based on the amount earned from the sell. If the investor has lost money from a trade or the selling of an asset, they can only claim that loss for a deduction by selling the asset (and realizing the loss).
For example, during the hype of Bitcoin, many investors have spent thousands of dollars on Bitcoin and either held the currency, sold or traded it for AltCoins, or simply sold it when it was high to earn a quick profit. This is all acceptable, but can lead to various taxation implications. For those that bought Bitcoin high and traded/sold for AltCoins, which ultimately lost most of their value, they incurred a confusing and expensive tax obligation.
Having a better understanding of realized and unrealized gains can help improve your productivity and reduce your pending tax liabilities.
No other forms of capital gains available?
If an investor or business has no other types of capital gains to offset their liabilities, they can still offset income up to $3,000.
Essentially, imagine an investor made $5,000 in crypto, but due to dwindling markets, they cashed out at a loss of $7,000. The investor would then be able to harvest a $2000 loss. That loss could then be applied to their $50,000 annual income, making only $48,000 taxable for the year.
What is tax loss harvesting?
This term is a strategy often used to offset and reduce investment losses regardless of financial instruments. Typically, it’s 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 learn more about tax loss harvesting, visit this link.
Where To go from here?
Blox always goes the extra mile to provide investors, individuals and businesses with all the knowledge needed to handle crypto accounting, tracking and taxation. With the right tools and technology, the handling crypto taxation will become simple and even automated for entry-level investors to advanced crypto funds and high-networth individuals. Ultimately, everyone that owns or transacts with crypto is susceptible to the same rules, guidance and benefits of smarter crypto accounting.