Save on Crypto Taxes With Our Tax Loss Harvesting Tool – US 🇺🇸
Last Updated: May 16, 2023
How Tax Loss Harvesting Works
When you purchase any asset, you have an acquisition cost (cost basis) which is equal to the amount you paid for this asset (plus any brokerage costs or fees). As the market fluctuates, the value of your asset goes up or down, creating an unrealized (paper) gain or loss depending on the market’s direction.
For tax purposes, you cannot claim a loss until you sell or exchange the asset with the loss. So if the market isn’t looking too good and you have unrealized losses, if you sell or exchange the assets with the losses, you will then be able to claim the loss! The selling or exchanging of the asset constitutes a taxable disposal, which means that at that point, you can recognize your gain or loss for tax purposes – since you had an unrealized loss, by selling, now you can claim this loss!
The idea behind tax loss harvesting is simple – sell positions of assets with unrealized losses to turn those into realized losses, claim the losses on your tax return, offset any short or long-term capital gains tax and minimize your tax bill.
How to Use The Tax Loss Harvesting Tool
Applying tax loss harvesting to your crypto portfolio is a simple way to minimize your tax bill. It consists of selling assets that are down in investment to turn your unrealized losses into realized losses. While that may sound simple, the difference between just realizing losses and tax loss harvesting effectively can be very significant.
It can be challenging to know which assets should be sold or even which assets are in loss positions. The Tax Loss Harvesting Tool will make this a whole lot easier. Breaking your assets down first into wallet, then into tax lots, you’ll be able to see the tax impact of selling each asset.The Tax Loss Harvesting Tool brought to you by Accointing by Glassnode provides you with all the data you need to identify the unrealized losses in your coins and sell the coins that will generate the biggest loss. Your coins are organized by wallet and then by tax lots, ordered by earliest to most recent. You can see each separate tax lot, the unrealized gain or loss and its potential tax impact and decide which positions you might want to liquidate.
Frequently Asked Questions
How much losses can I deduct in a year?
You can deduct as many losses as you actually realized in the year. If your losses exceed your capital gains, you can deduct up to ,000 per year against ordinary income such as wages, active business income, consulting income, etc.
Can I carry losses forward?
Yes. If your losses exceed your capital gains, you can deduct up to ,000 per year against ordinary income, such as wages, active business income, consulting income, and carry the excess forward to offset future capital gains.
Is this allowed?
Yes. This strategy for reducing your tax liability has been used by financial advisors and their clients for many years with equities and other assets. This strategy is not based on a loophole but on tax law, which states that a sale, trade or disposal is a taxable event at which a gain or loss must be reported. If you sell an asset at a loss, you can deduct that loss.
Can I buy back the same assets?
In traditional finance, the Wash Sale Rule forbids traders from doing just that. It states that if you repurchase assets after selling at a loss, you cannot claim this loss, and you instead defer the loss until you sell this repurchased asset. However, as of today, this does not apply to crypto.
Internal Revenue Code §1091 provides the law on wash sales, which applies specifically to “stocks or securities”, and the IRS FAQs clearly state that cryptocurrencies are property. This has created a loophole for crypto traders for the time being. However, legislators have actively sought to close this loophole, and it is expected that they will do so soon.
Will the IRS see this as aggressive?
While the Wash Sale Rule doesn’t technically apply to crypto, we recommend not buying back the same assets you sell within thirty days. Doing so makes your sale appear for tax purposes only, which the tax authorities do not like. If you sell an asset, do it for non-tax reasons (you no longer believe in the asset, you need the money, you want a different asset, etc.) and do not buy back the same asset within thirty days if you are worried about the IRS challenging your tax loss.
Can my losses reduce my gains?
Yes! Short-term losses offset short-term gains while long-term losses offset long-term gains. A short-term loss can further offset a long-term gain and vice versa.
The information presented in this guide is for educational purposes only and is not financial or investment advice.
The information contained in this guide, including any supplemental materials, is for general information purposes and does not constitute legal or tax advice. In specific individual cases, the present content is not intended as a thorough, in-depth analysis, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. Please consult your tax advisor.