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What is crypto tax-loss harvesting?

What is crypto Tax Loss harvesting

TL;DR Breakdown

  • The capital owner can save their money using fluctuations in crypto losses.
  • The use of crypto tax-loss harvesting can help with the tax return or reduction.
  • The mentioned strategy can be used to lower the tax bill.

The concept of loss and gain in the crypto market is essential as this investment can incur either gains or losses. Due to the volatile nature of the market, there are chances that you come across losses or gains depending on the coin you have invested in.

Since the recognition of crypto investment as capital investment by the controlling authority, IRS, it has been liable to taxes. Therefore, the investors have to act wisely and save their precious capital, as there are always ups and downs in the market. An evident example is December 2021, which has brought huge losses to the crypto market.

Due to the growing crypto industry, people are flocking to invest in it. These investments are not only a source to keep the money safe, but the fluctuations, usually on the positive side, help appreciate its value. The crypto market keeps fluctuating, and hundreds of changes are taking place. The investor can benefit from this situation through taxes on the capital.

Crypto tax harvesting can benefit investors, as they will utilize the dips in the market. Here is a brief overview of it.    

Crypto tax loss harvesting

The investors take benefit of different strategies that not only help with the safety of capital but also ensure that it appreciates. One of these strategies is crypto tax harvesting. If you face losses in the currency where you have invested your capital, you won’t have to pay taxes for it. This strategy is named crypto tax-loss harvesting.

The mentioned strategy is very significant in December when the year is closing, and the owner has to pay taxes. Many investors show the cryptocurrency they have sold at a loss and save taxes on the given sum. The lower the tax bill, the more they can save their worth.  

People have been using this strategy since 2014 when crypto was recognized as a capital asset. The gain or loss in the mentioned area is determined by comparing proceeds and cost basis. Cost basis is the sum that the investor pays at the time of investment, while proceeds are the sum that they are paid when they divest their money or is the sum received at the close of investment.

If someone purchases a currency of $2K and it depreciates to $1K, they will take benefit of crypto loss harvesting. The investor will have to pay tax on the mentioned sum in case of gains. As there are several fluctuations in the crypto market in the year, this results in a mix of gains and losses. These can be totaled at the end of the year to determine the final loss or gain.

The usual calculation by most people is at the end of the year, in the closing month, by which they determine their final assets. They check which of their assets are going in losses and harvest taxes. Calculating the losses in different year phases is better because there is no guarantee that either a currency will bring losses or gains. Thus, you can make these calculations and keep a record to use it for your benefit in taxes. A tax professional can be of help in this regard.

Risks and benefits

As the benefits of crypto tax-loss harvesting are clear, it would be better to consider the risks. Mainly there are two risks involved, which are given as follows.

You might be able to harvest losses on the capital and save money, but it is not forever. Later, you will have to pay taxes when you disclose your total worth.

The next risk is the costs of the process you will go through while saving taxes. Sometimes the money on the process is more than the taxes you will have to pay.

Final thoughts

The Crypto market has brought many benefits to the user, and one of these is crypto tax-loss harvesting. You can keep the total capital safe, and even the losses will bring you benefits. As December is ending, you can benefit from it and calculate losses to save taxes on the mentioned losses.  

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Shawn Du'Mmett

Shawn Du'Mmett

Former IT development and consultant, remote team and collaboration expert, PM, CCO, writer, dreamer, idealist looking to collaborate with global teams on a global teal/turquoise organisation. Shawn's dream is working together openly, to get what writers need and want, and to solve biggest global problems. He is building a collaboration system from the start that everyone can own and define, allowing them to work together, to decide how it works and to their highest ideals.

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