It is arguable, but we probably can agree that 2022 hasn’t been a great year for cryptocurrencies, and crypto tax loss harvesting is gaining importance as a consequence of the struggles of last year.
Almost 60% of the value of Bitcoin, the most well-known cryptocurrency, was lost last year, and many other altcoins also suffered losses. Even though the deadline for reporting cryptocurrency losses for the 2022 tax year has passed, there are still certain tax savings strategies you can use if you intend to keep investing in stocks, bonds, or other securities in the future.
What is crypto tax loss harvesting?
Crypto tax loss harvesting is a technique that benefits from the IRS rules and enables you to deduct capital losses from investments, real estate, or cryptocurrency from your taxes in order to reduce the amount of tax you owe on profits in subsequent years. When properly recorded, capital losses can reduce your taxable income for the year by up to $3,000 and any capital gains income you received in the same year. If your overall losses are more than $3,000, you can carry the remaining amount forward to tax returns for subsequent years. We like this since it may reduce your taxable income and possibly even your tax obligation.
However, crypto tax loss harvesting has some restrictions. Only until the loss has been “realized,” or after you’ve sold your coins, can you deduct capital losses from your cryptocurrency holdings. Whether you’ve owned a coin for more than a year or not affects the tax rate as well. Yet, given the number of sector scandals that occurred last year, many investors who are waiting on big losses might just prefer to sell their assets and move on. If you choose to do this, be aware that you may be able to “harvest” your losses and save by paying some taxes in the future.
Here is some additional information on how crypto tax loss harvesting works for investors as well as some advice from qualified professionals.
How does the IRS classify and tax crypto?
According to Ryan Losi, executive vice president and certified public accountant of the accounting company PIASCIK, the IRS views cryptocurrencies as property rather than securities. According to Losi, “In 2014 and subsequent notices, the IRS has specifically expressly said not to treat [crypto] as a security, but rather as a property.”
A capital gain occurs when you sell a house or other asset for more money than you bought for it; this additional money is then liable to capital gains tax. Depending on how long you held the asset, this tax rate changes. A short-term gain is one that is taxed at the same rate as your income tax if you held the asset for less than a year.
|Income (2022 tax year)||Capital gains tax rate (short-term)|
|Less than $10,275||10%|
|$10,276 to $41,775||12%|
|$41,776 to $89,075||22%|
|$89,076 to $170,050||24%|
|$170,051 to $215,950||32%|
|$215,951 to $539,900||35%|
|More than $539,900||37%|
In contrast, the IRS refers to this capital gain as a long-term gain if you held your assets for more than a year and will tax you for the 2022 tax year at one of three rates.
- Your capital gains tax rate is 0% if your taxable income was $41,675 or less.
- The rate is 15% if your taxable income fell between $41,676 and $459,750.
- The rate is 20% if your taxable income was greater than $459,750.
None of the higher rate exceptions listed by the IRS presently apply to cryptocurrencies.
When you’re making your calculations for crypto tax loss harvesting, there are also losses of capital. A capital loss occurs when you sell an asset for less than you paid for it. Many investors who have held bitcoin since the beginning of last year are probably currently sitting on a sizable capital loss. If you sell your cryptocurrency at a loss, the loss can be applied to other capital gains in the current tax year and possibly in the following ones as well.
Up to $3,000 of your capital losses (or $1,500 if you’re married, filing separately) may be subtracted from your taxable income if they outweigh your gains. Any remaining unapplied losses may also be carried over and used in a subsequent tax year.
Realizing a loss can result in a tax advantage for you. In a word, this is tax loss harvesting, and some investors use it to protect their future earnings.
Can you sell coins, file a loss claim, and then immediately repurchase them?
Yes, technically. One benefit of the IRS recognizing cryptocurrency as a property rather than a stock is that it does this.
According to the IRS’s wash sale rule, investors cannot deduct their losses as capital losses from their taxes if they sell an asset at a loss and then buy a “substantially identical” investment within 30 days of the sale. Consider this as the IRS’s attempt to deter large numbers of transactions (and ensuing market instability) from those attempting to manipulate the tax loss harvesting procedure.
However, if you’re considering using crypto tax loss harvesting, as of the time of writing, the wash sale regulation does not apply to cryptocurrencies. “If their definition later gets expanded by Congress, then OK, but until then, crypto is not considered a security,” Losi said. As a capital loss cannot be claimed until it has been realized, if you are now profiting from the cryptocurrency dip, selling your coins and then buying them back later is technically acceptable for the time being and would allow you to realize the loss for tax purposes.
According to Christian Rivera, CPA and CEO of The Ecommerce Accountants, an accounting firm, the method is important enough that some bitcoin software providers offer a mechanism to automate tax loss harvesting. “What some investors do is use software tools like TaxBit to track what’s called your basis in your investments. These are your realized gains or losses. If you have realized gains, but also have losses that are not realized yet, [the software can] trigger those trades so that you cash out on losses and avoid getting stuck in a huge taxable position,” Rivera says.
However, we recommend that if you want to use a tax loss harvesting approach frequently, consult with a tax expert.
Claiming cryptocurrency losses on your taxes
In order to apply the crypto tax loss harvesting method, you must first indicate on Form 8949 whether your crypto losses were short-term or long-term before you may claim them. If you also have capital gains in the same tax year, the kind of loss will matter, according to Eric Bronnenkant, CPA and head of tax at financial advisory firm Betterment. The kind of your loss may have an influence on the net tax that you pay if your gains surpass your losses according to Bronnenkant. If you intend to carry the loss over to subsequent tax years, the type of loss will also be important.
Your Schedule D, which determines your overall net capital gain or loss, will then include Form 8949. Then, you’ll include Schedule D with your Form 1040. If you utilize a cryptocurrency exchange, make sure to check to see if they’ve provided you with a form, like a 1099-MISC, so you can compare data.
Knowing that you might have to pay for a higher grade of service in order to report cryptocurrency activity is important if you’re utilizing tax software to submit your taxes this year.
Hopefully, this article gave you a detailed idea as to what is crypto tax loss harvesting and how to apply crypto loss harvesting to your tax reports. If you have any questions on your mind before applying the crypto tax loss harvesting technique yourself, we strongly recommend taking another look at the IRS regulations or consulting a text expert. If you’re curious about any other crypto developments, check out the articles below too see if you could learn more.