Tax-loss harvesting (TLH) is a powerful tax strategy that enables investors to offset gains and save on taxes by selling assets at a loss. While crypto markets may be thriving, most portfolios contain underperforming coins or NFTs that can be strategically sold in December to reduce your upcoming crypto tax bill.
What Is Tax-Loss Harvesting?
Tax-loss harvesting involves selling assets—such as cryptocurrencies, Non-fungible tokens (NFTs), or stocks—when their market value falls below their purchase price (cost basis). This practice allows you to realize the loss and use it to offset capital gains or other taxable income.
When Should You Tax-Loss Harvest on Crypto?
Although TLH can be implemented year-round, many investors prioritize it towards the end of the year. By timing these transactions in December, you can aim to reduce their current-year tax liability or prepare for potential future gains.
Why Implement Crypto Tax-Loss Harvesting?
TLH is a straightforward, high-impact tax-saving strategy that doesn’t require professional assistance.
How to Execute Crypto Tax-Loss Harvesting?
- Identify assets that are underwater: Determine which assets are trading below their purchase price. Crypto tax software tools or your personal books & records can help you identify which assets qualify for TLH.
- Sell the assets: Use a trading platform to sell the underperforming assets.
- Optionally reinvest: If you believe in the long-term potential of the asset, you can repurchase it immediately without waiting for 30 days.
Unlike stocks, cryptocurrencies and NFTs are exempt from the wash sale rule, meaning you can sell and repurchase the same asset immediately. However, for stocks, the wash sale rule prohibits deducting losses if you repurchase the same security within 30 days of the sale.
How Much Can You Deduct by Crypto Tax-Loss Harvesting?
- Unlimited harvesting: There’s no cap on the total losses you can harvest in a year.
- Annual deduction limit: You can deduct up to $3,000 in net losses against ordinary income.
- Carry-forward losses: Any remaining losses can be carried forward indefinitely to offset future gains.
For example, if you sell Coin A at a $20,000 loss in 2024 but have $15,000 in gains from Coin B, your net capital loss is $5,000 ($15,000 – $20,000). You can deduct $3,000 in 2024 taxes and carry forward the remaining $2,000 ($5,000 – $3,000) to offset future gains.
Downsides of Crypto Tax Loss Harvesting
While TLH offers significant tax advantages, there are some drawbacks:
- New holding periods: If you repurchase the same asset after selling it, the new purchase resets the holding period. This means, you will need to wait 12 months for it to qualify for favorable long-term capital gains tax rates.
- Deduction limits: The $3,000 annual deduction cap means that larger losses may take years to fully deduct.
Consult Your Tax Advisor
TLH is a versatile tool, but nuances such as netting rules and individual tax circumstances can affect outcomes. Always consult with a tax professional to tailor this strategy to your financial situation.