Why Now May Be the Time for Crypto Tax-Loss Harvesting
This year has been tough for cryptocurrency investors, as a brutal bear market wiped about 65% from the market capitalization of Bitcoin.However, every cloud has a silver lining, and this time it comes in the form of crypto tax-loss harvesting—a strategy in which investors can sell assets at a loss to offset tax requirements.
Tax-loss harvesting is a strategy used by investors to lower their capital gains tax liability to the U.S. government. To use this strategy, an investor will sell an investment at a capital loss to take advantage of timing in the market or for the tax year. The loss can then be used to offset capital gains from other assets that produced a profit or to offset future gains from that same investment or other profitable trades.
For example, let's say an investor bought a stock and realized $5,000 in losses with no other capital gains from it. That investor could use the loss to offset $3,000 of ordinary income for that tax year and roll the remaining $2,000 loss forward to offset future capital gains or income.
Cryptocurrency investors can use tax-loss harvesting in the same way as a stock investor.
If an investor bought $10,000 of a crypto token in April 2022 and was holding the same investment at $7,000 in December, that represents a 30% unrealized loss. By selling the investment at a $3,000 loss, they could use that $3,000 to offset other taxes owed from the financial year. The loss could also be carried forward to the next tax year.
Capital losses taken in cryptocurrency do not have to be used solely for harvesting in crypto assets. Losses can be used to decrease the tax liability on other asset classes, such as stocks, bonds, and real estate.
Tax-loss harvesting can only be used to offset $3,000
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