Cryptocurrency Tax-Loss Harvesting

And I ain't too proud to tell ya that I cry sometimes

I cry sometimes about it

And girl I know it hurt but if this world was perfect

Then we could make it work but I doubt it

And I aint too proud to tell ya that I cry sometimes

I cry sometimes about it

And girl I know it hurt but if this world was perfect

Then we could make it work but I doubt it

-Lost Ones by J Cole

It amazes how many people think about tax planning near the end of the year. The end of the year is the holiday season! Why do people think accountants don’t have families? I personally have one child born on Oct 30th and two other children born in mid-November. The end of the year is crazy for me! Luckily for my clients, I must work to pay for my family’s birthday and holiday gifts. So, now that we are on the topic of tax planning, let’s talk about a strategy called tax-loss harvesting. Tax-loss harvesting is a strategy recommended by most accountants and financial advisers generally toward the end of the year. Tax-loss harvesting is the practice of selling stocks, mutual funds, exchange-traded funds and other securities that are now worth less than what investors paid for them. By realizing or “harvesting” a loss, taxpayers can offset taxes on both gains from other investments. Did you know that you can use the same strategy for your cryptocurrency losses? Let’s talk about it!

Since cryptocurrencies are treated as “property” under IRS rules, that means the same capital gains rules apply. Therefore, any cryptocurrency loss can be used to offset gains on other investments you traded, such as stocks in your portfolio. The deadline for realizing losses on your cryptocurrency is December 31st. You will need to sell your cryptocurrency at a loss within the calendar year if you want to harvest those losses to offset other gains you will have to pay the IRS. For example, if you want to use the strategy for 2022 tax returns, you must sell the cryptocurrency at a loss the year between January 1, 2022, and December 31, 2022, even though the 2022 tax returns are due the following year on April 15, 2023.

You can claim up to $3,000(or $1,500 if you are married and filing a separate tax return) in capital losses as a tax deduction, subject to a host of rules. You can carry any unused balance over to subsequent tax years if your losses exceed this amount. For example, if you have $27,000 of net capital losses and you are a married taxpayer, then you deduct $3,000 of your capital losses against your other income. The remaining $24,000 of net capital losses roll over to next year’s tax return. Keep in mind, that if you and your spouse file as married but both have more than $3,000 in cryptocurrency losses each, you are still capped at $3,000 total on the joint tax return. If the net capital loss is less than or equal to $3,000, then the entire amount of the net capital loss can be used in that year’s tax return to offset other types of income. Offsetting other types of income simply means that the net capital loss reduces how much income is being taxed this year.

The short-term loss would be taxed at investors’ ordinary income rates according to your tax bracket. Long-term capital gains are taxed at long-term capital gains rates, which are less than ordinary tax rates. The long-term capital gains tax rate is either zero percent, 15 percent, or 20 percent as of 2022, depending on your income. Capital gains are reported using Schedule D and Form 8949. Also, don’t forget to report the transactions on your state tax returns.

Need help with your crypto taxes? Well, contact Jamaal "Crypto J" at jamaal@jstaxcorp.com!

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Cryptocurrency Tax-Loss Harvesting

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