Crypto Loss Harvesting
Many of the popular projects from 2017 are trading at discounts of 90% or more.
For instance, if you invested in XRP at its peak of $3 which is trading now at 22 cents, a loss of 93%.
Some crypto tax professionals have proposed to harvest the losses to take advantage of a loophole in the existing tax system.
What is crypto tax loss harvesting?
Crypto tax loss harvesting is simply disposing your digital assets that you bought at peaks that are down in the market and buying them back immediately.
This way, you are not losing your position in the asset but you get to accumulate losses to write off against other gains.
In our example above with XRP, if you keep holding on to your XRP that you bought at $3 while you are making gains on other projects, you are simply paying too much taxes.
Is harvesting tax losses worth it?
Let’s assume following details for this example:
- You bought 10,000 XRP for $3 each
- You made gains of $25000 in crypto trading on other assets during the current year
Let’s see how your taxes will look like if you harvested the losses.
You would be able to save $7500 in taxes and have $2800 (worth $840 in tax dollars at 30% tax rate) in capital losses to carry forward to next year to take more advantage.
Why would anyone not do this?
Is tax loss harvesting flawless?
You know how they say taxes are ‘complex’, here is where we will deal with another example to explain a twist in the tax plot.
Let’s say you got VeChain (VET) for a conversion of 1:100 when the VET price was $5. Current price of VET is .02 (that is $2 for 100 units that you got). You sell your position to harvest the loss for the current year.
For simplicity, we will use the 10,000 units example; The year after you harvest your losses, bulls push the VET price to 50 cents.
Thankfully you still have your position in VET, so you now sell your 500,000 units for $250,000.
Let’s see what happens.
In year 1, when you sold your VET worth $30,000 at 2 cents, you realized a net loss of $5000, as shown above.
In year 2, bulls takeover the market and push the price of VET to 50 cents and now your gains from the sale are $250,000. However, these gains will now be taxed at ordinary income tax rates instead of capital gains tax rates.
Capital gains tax rates are usually favorable and only apply to assets you hold for more than 1 year.
Unfortunately, when the bull market is in full swing, you cannot wait to qualify for the capital gains tax rates by holding onto your assets for 1 full year, you will probably sell to realize the gains.
In the example above, because of tax loss harvesting in year 1 you lost the long-term capital gains tax rate benefit and your tax bill was $16000 bigger (tax differential in year 2 of $23500 minus benefit of $7500 in year 1).
When is crypto tax loss harvesting most beneficial?
Generally speaking, we cannot time the market, however, if you are confident that the project you are invested in will not experience a bull run in the next year or so, then tax loss harvesting might make most sense.
If you expect the assets you hold to do well in the next few months or so, it may generally make sense for you to assess the difference in taxes by running a quick scenario.
Again, each individual’s situation is different and it is important that you consult a tax professional before pulling the plug on a transaction.
Thank you for reading and sharing this article. We appreciate you.
Stay safe and healthy!
Everything in this article is an opinion, not an advice of any kind. This material has been prepared for general informational purposes only and it is not intended to be relied upon as accounting, tax, investment, legal or other professional advice. Please consult with a professional for specific advice.
We do not endorse or guarantee the accuracy of the information and claims made.
All product and company names are trademarks™ or registered® trademarks of their respective holders. Use of them does not imply any affiliation with or endorsement by them.