Are you a crypto investor struggling to understand how to do your crypto taxes and tired of overpaying on your tax bill? Today, we're diving into crypto tax loss harvesting and how Crypto Tax Made Easy can potentially help you save a ton on tax!
Tax Loss Harvesting Explained
Crypto tax loss harvesting is a strategy that allows you to sell your underperforming crypto assets, creating a taxable loss that can offset your capital gains.
It can be one of the most effective ways to help reduce your tax bill and free up cash to reinvest in more profitable crypto assets. However, most of our clients wait until its too late to tax loss harvest and save on their tax bill. You have to sell the assets before the end of the tax year.
So we will discuss how tax loss harvesting works, and its drawbacks so you can make an informed decision with a tax professional about whether this is the ideal strategy for you.
Before you consider a tax loss harvesting strategy, it's important to get an informed opinion from a tax professional about how the rules apply in your country's tax code.
Comparing Tax Loss Harvesting in the United States and Australia
The differences between tax loss harvesting in the United States and Australia, for example, are substantial. A crucial distinction is the application of the wash sale rule in each country.
In the United States, the wash sale rule applies to securities. But many crypto assets like Bitcoin are not yet regulated as securities. This means that U.S. crypto investors can potentially sell an underperforming asset, claim the tax loss, and repurchase the same asset immediately without facing any restrictions.
In Australia, on the other hand, the Australian Tax Office (ATO) has released guidance indicating that it will crack down on wash sales involving crypto assets. The ATO has published a press release that it will use advanced data analytics to determine whether Australian crypto investors engaged in wash sales. And they have said that they will charge penalties + additional taxes on investors who attempt wash sales.
Therefore, in Australia it would be wise to only focus on selling underperforming assets that you do not want to hold long term or repurchase.
Crypto Tax Loss Harvesting Explained
To effectively utilize tax loss harvesting, you'll need an accurate cost basis for all your crypto tokens.
Cost basis is, simply, what did it cost to acquire the tokens you are trading to lock in a tax loss? This is not always easy to determine. Especially if you have tried yield farming, staking, or other decentralized finance protocols.
To get an accurate cost basis, you need to set up your tax software, manually categorize transactions the software doesn't automatically recognize, and reconcile your on-chain balances. This is something Crypto Tax Made Easy can help with.
Once everything is set up, you can simulate trades in your tax software to see the tax impact, avoiding any nasty surprises at tax time.
Crypto Tax Loss Harvesting Example
For example, if you bought some "MarsCoin" at $10, and now it's worth $5, selling MarsCoin will generate a $5 loss that can be used to offset your capital gains. This strategy also allows you to explore more promising crypto investments and potentially increase your profits.
It is important to understand the potential downsides of Tax Loss Harvesting which I will discuss in the next issue.
Ready to tackle your crypto taxes like a pro? Subscribe to download our crypto tax guide now. The Guide will teach you how to properly set up your tax software, start labeling transactions, and get an accurate cost basis.
If you need help or want someone to do it all for you, contact us at Crypto Tax Made Easy. We'll help you generate an accurate crypto tax report and ensure you don't overpay on your tax bill.