The crypto markets had a volatile 2020, and that might mean you lost money on your cryptocurrencies. Here's everything you need to know about how you can offset your crypto losses by putting tax-loss harvesting to work.
“Tax-loss harvesting” is a strategy that can help you reduce investment losses. 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 stocks in your portfolio.
Does Tax-Loss Harvesting Apply to Me?
Do you have gains from other investments this year (like stocks) that you’ll need to pay taxes on for your 2020 return? If so, you can use losses from crypto for a tax win, by offsetting any gains you had in other positions and/or offset even ordinary income. You will most likely want to REALIZE enough capital losses in crypto in order to OFFSET your capital gains in stocks or other places. You can also often use up to $3,000 USD in capital losses towards income you earned.
The Deadline is December 31st
Don’t delay! The deadline for realizing losses on your crypto is DECEMBER 31st. You will need to sell your crypto at a loss within the 2020 calendar year if you want to harvest those losses to offset other gains you will have to pay the IRS this year.
How to Use ZenLedger's Tax-Loss Harvesting Tool - 3 Easy Steps
Our tax-loss harvesting tool lets you know how many unrealized capital losses you have in each token type. Once you see this preview, you can then decide if you want to realize the loss. You can decide which token(s) you want to realize the loss on, and by how much.
Step 1: Launch the Tool
After you upload your transactions, you’ll see a menu item called Tax-Loss Harvesting on your dashboard. Click on this link and we will begin to run our tool. It will take about 15 seconds to process.
Step 2: Read the Results
The output of our tool is a Google spreadsheet that will open in a new tab of your browser. Each tab represents your unrealized capital loss.
The first two tabs are summaries of your total potential losses to harvest, organized by currency. You can toggle between LIFO, FIFO, and HIFO accounting methods in the spreadsheet. We take a deeper look at LIFO and HIFO below.
ZenLedger's Tax Loss Harvesting Tool - Source: ZenLedger
Tab 1: Summary by FIFO
This tab summarizes your losses as accrued by using the FIFO accounting method (more widely recommended by tax experts). Please note that you must be consistent year to year and between your tax-loss harvesting and your reporting on your 8949 or Schedule D. You cannot switch between these, you have to choose one and stick with it.
Tab 2: Summary by LIFO
This tab summarizes your losses as accrued by using the LIFO accounting method. Please note that you must be consistent year to year and between your tax-loss harvesting and your reporting on your 8949 or Schedule D. You cannot switch between these, you have to choose one and stick with it.
Tab 4: FIFO Ordering of Sells
This table shows you all of the coins you currently own that have an unrealized loss using the FIFO accounting method. This is the raw data we use to create your summaries on tab 1 and 2.
Tab 5: LIFO Ordering of Sells
This table shows you all of the coins you currently own that have an unrealized loss using the LIFO accounting method. This is the raw data we use to create your summaries on tab 1 and 2. Choose this if you want to realize all of your capital losses in crypto, or just enough to offset your non-crypto capital gains and $3,000 in income taxes.
Step 3: Realize Losses by Selling Your Crypto
Once you see where you have losses to harvest, it’s up to you to take action: Share this data with your tax professional so the two of you can decide on the best approach, or log in to your exchange(s) and sell your coin(s).
The Bottom Line
The ZenLedger tax-loss harvesting tool tells you what coins have unrealized losses, but we do not direct you to an exchange or wallet to sell from. This is because all your coins are in the same “accounting” bucket.
Want to try out our tax-loss harvesting tool? Click the button below to create an account.