Crypto Tax Loss Harvesting Explained

Tax-loss harvesting is an old investment method used to reduce a year-end tax burden. The harvesting refers to the practice of selling assets at a loss to offset an earlier gain. The loss is “harvested” when the asset is sold, which reduces the total amount of taxes one has to pay.

Cryptocurrencies are considered intangible assets by the IRS. This means that, just like buying and selling stocks, cryptos can be harvested to reduce your yearly tax burden. Below is an example of tax-loss harvesting.

Let’s say you own 1 bitcoin which you purchased in late 2017 when the price was at $12,000. Your 1 coin today sells for $8,200, which is about 30% under what you purchased the coin at originally. Per IRS tax regulations, selling a virtual currency triggers a taxable event. This taxable is treated as a capital gain or loss, and would be a long-term capital gain as the bitcoin was held for over one year. You could sell the bitcoin for $8,200 and wait one week and purchase $8,200 of ethereum (ETH). From a tax perspective, you have a capital loss of $2,800, or the original $12,000 minus today’s market price of $8,200. This loss is harvested when you rebuy into the market, using that $8,200 to purchase ETH coins. Importantly, that loss can offset any other gains in your portfolio or reduce your total taxable income.

Fortunately, cryptos have an additional property that makes them exceptionally good at tax-loss harvesting. This is the wash sale rule. With traditional securities, like stocks, investors can’t sell a stock and buy the same stock back in a 30-day window. Why is this important? In Publication 550, the IRS states that the wash sale rule only applies to securities, not property. While there may be some complications, you can sell a crypto, trigger a loss, repurchase the same crypto days later, and harvest the loss.

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