The crypto markets have been volatile in 2018, and for some crypto investors, that might mean you have lost money this year as cryptocurrencies have suffered recent losses. Of course, that’s not the outcome any investor hopes for, but the good news is that there is a way to recoup some of that apparent loss.
It’s a tax strategy that you might be unfamiliar with, called “tax loss harvesting,” that can help you reduce investment losses. Here’s everything you need to know about how you can offset your crypto losses by putting tax loss harvesting to work.
What is Tax-Loss Harvesting?
The word “harvest” means to “gain, win or use,” and that’s essentially what investors will do with tax loss harvesting. You are going to use your losses for a tax win, by offsetting any gains you had in other positions and/or offset even ordinary income.
Since crypto is treated as “property” under IRS rules, that means the same capital gains rules apply. So any crypto losses can be used to offset gains on other investments you traded, such as a stock in your portfolio.
Here’s an example: Let’s say your crypto accounts were up $10,000 after a banner start to 2018 with a surging market. If you had sold then to recoup a profit, you would have had to pay capital gains on those positions. But then the market tumbled in November, and you decided that you didn’t have the stomach for the roller coaster. You sold your positions and ended up with a loss of $5,000 from your crypto accounts.
Instead of just accepting that loss, now you can “harvest” it to offset other taxes you owe, whether from a gain from another investment you sold, such as in a traditional stock portfolio, or if you don’t have any gains to account for, it can be applied against your income, so that you are paying less taxes than you otherwise would if you didn’t file this loss. So for example, if your income is $45,000 and you are harvesting a $3,000 loss, you would only pay taxes on $42,000 in income.
The Limitations of Tax-Loss Harvesting
There’s really only one limitation, but it’s easily mitigated. That is, you can’t write off limitless sums—the tax loss harvesting capability is capped annually at $3,000 (or $1,500 if married but filing taxes separately).
So in our example above, you could write off that $3,000 but would still be realizing a $2,000 loss for this year. However, all is not lost: That can be rolled over to the subsequent year, when you can use the same tax harvesting strategy and apply that $2,000 to offset a taxable gain or income on your taxes that year.
In terms of other limitations, tax harvesting in cryptocurrency avoids another major limitation you would encounter if you were trying to use the strategy for stocks. That’s because one major deterrent to tax harvesting for stocks is called the wash sale rule, which means that you can’t buy the exact same investment for 30 days after selling it for a loss.
So, as an example, you couldn’t sell Acme stock at a loss and then turn around next week and re-buy the Acme stock, yet still take those losses on your taxes.The good news for crypto investors is that the wash rule does not apply so if you sold crypto coins at a loss, but decided to turn around and buy the exact same coins again even the next day, you could do so and not trigger the “wash rule”—at least for now.
The Forms Your Need For Tax-Loss Harvesting
So how do you report these losses on your taxes? Reporting gains and losses in cryptocurrency is a little tricky, given that it’s not always easy to figure out the cost basis of your purchase.
But once you have figured out your accounting, you need to fill out IRS Form 8949, “Sales and Other Disposition of Capital Assets,” where you account for dates, cost basis and dollar values of all trades. You then transfer this net loss calculation to your 1040 Schedule D to realize the tax loss harvest on your tax return.
Always Pay What You Owe
Of course, if you have held your crypto for a long time, you might have seen a rise in value. In that case, you need to remember that the IRS expects its share of any gains you have realized.
And we will repeat: Avoiding Crypto Taxes and Accounting is not a solution. While Crypto Taxes and Accounting loss harvesting can be a smart investment strategy to offset any crypto loses, remember as always to seek professional advice for any questions you have about cryptocurrency taxes in order to avoid penalties or worse for not accounting for your investments properly.