Tax Loss Harvesting: Understanding the Basics
Taxes. The dreaded word that everyone hates. As much as we don't like separating ourselves from our hard-earned money, taxes are a necessary part of any society. However, if you’re smart about it, one can save money on their crypto taxes using tax loss harvesting. Today, we’ll go over the basics of how and why to claim a loss on your crypto assets in order to reduce that ever so important tax bill at the end of the year.
Tax loss harvesting; what is it why does it matter?
Simply put, tax loss harvesting is a strategy where one sells their crypto which they hold at a loss in order to decrease capital gains tax. The most intelligent investors activate these capital losses towards the end of the year in order to save some money on their taxes. It may sound complicated but thankfully, there are a variety of crypto tax software options to help make this task easier.
Tax loss harvesting; how it works
No one cares if you bought your Bitcoin (BTC) back in 2009 and you treat it like your favorite child. All that matters is that in the current day in age, the government treats that Bitcoin, and all other cryptocurrencies as a capital asset. Hence, wherever you spend crypto, buy crypto, or trade crypto, you create a gain or loss event. You may even be “HODLing” crypto right now at an unrealized loss. The trick is recognizing these losses and learning how to benefit from it.
This is the art of tax loss harvesting. Strategically bringing your unrealized losses to light. It’s ok if you don’t have any gains. You can harvest your losses in order to deduct a higher amount from your income or also to offset any gains from additional assets in traditional markets like the stock exchange.
Let’s look at an example.
- Your total stock market capital gains for this tax year = $20,000
- You also have some BTC that you HODL and recorded a total loss of $10,000.
- If you don’t sell that BTC, then you are responsible for paying capital gains tax on that $20,000.
- But then if you harvest your BTC losses by selling the BTC and claiming that $10,000 loss, then your total capital gains are reduced to $10,000.
- Therefore, splitting your tax payment by 50%.
Tax loss harvesting: timing and amounts
As for when to initiate the tax loss harvesting process, that’s up to you. The only requirement is that you harvest during the tax year. After the tax year is over, your gains and losses are then locked in. That’s why most people choose to do their harvesting during the last month of the tax year.
In regard to the number of crypto losses you’d like to harvest, that again is up to you. Some people opt to sell their assets so they end up paying $0 in capital gains which others do it so they actually record a total capital loss. Why would someone want to report a loss?
Well, reporting a capital loss on your tax return actually comes with benefits. If you report a total capital loss in crypto, then youcan strategically use that loss to offset gains from other assets like stocks. Then, when you file your return, you simply deduct that amount from your income (limits may vary) or you can choose to use that capital loss for future capital gains in crypto or other assets.
Tax loss harvesting vs crypto loans
While YouHodler’s instant crypto-backed loans are a fantastic way to get quick cash without having to sell your favorite crypto assets and miss out on future gains, it is not a method to avoid capital gains tax. Generally speaking, if a trader holds crypto for a year or more, then they are eligible for something called “long-term capital gains rate” which is significantly lower than the tax you pay on short-term capital gains (e.g. selling your BTC).
Hence, it pays to HODL and HODLing is our specialty. So don’t sell your crypto. Use it as collateral for a crypto loan on YouHodler to get your cash when you need it. Alternatively, put your crypto into our famous savings accounts where you can earn up to 12% a year interest. Lastly, play with the market’s volatility with our Multi HODL tool and discover a new way to profit.
With a combination of long term HODLing on YouHodler and tax loss harvesting, you can strategically lower your tax bills while simultaneously being 100% law compliant.