It’s harvest time, but we aren’t talking fruits and vegies, we are referring to an investment strategy that can help you save money on taxes – Cryptocurrency Tax-Loss Harvesting.
This is not a new concept, but one gaining popularity. In short, tax-loss harvesting means selling investments on which you show a loss, and using that loss to offset profits (capital gains) on your other investments. In this way, you minimize your capital gains taxes.
There are limits
You are allowed to claim only a limited amount of losses on your taxes in a given year. You are allowed up to $3,000 per year to offset taxable income, $1,500 if you are married filing separately. Now, if you had a particularly bad year and are showing more losses than the limit, you can capital gains for as many years as necessary until you’ve used up the entire amount.
The IRS has requirements
The IRS has plenty of additional rules governing this strategy, so study up before you attempt such maneuvering. Even better, learn the basics and then rely on a trained professional to execute the transactions. Many investment firms and financial planners are now including Tax Loss Harvesting in their services.
Involve informed professionals
Make sure your accountant is also well acquainted with Tax Loss Harvesting. They will need to report your transactions to the IRS using Form 8849 and Schedule D (Form 1040).
Other things you need to know
Other important things you need to know include the Wash Sales Rule, and accurate records requirement.
- Wash Sales Rule – Your loss is disallowed if, within 30 days of selling the investment (either before or after) you or your spouse invests in something that is identical (same stock or fund) or, in the words of the IRS, “substantially similar” to the one you sold. Keep that calendar handy! This is not in effect for Cryptocurrency tax!
- Tracking Cost Basis – Unless you purchased your entire position in a stock, mutual fund or EFT at a single time, the price that you paid for the investment varied. Good records of every sale or purchase are mandatory.
Another thing to keep in mind, since this approach is for the purpose of offsetting taxable gains, there is no reason to try to minimize gains in tax-sheltered accounts such as 401(k)s, IRAs, etc.
Put it on your calendar!
And finally, know the deadline! You only have until December 31st to complete you tax-loss harvesting. This is not like opening an IRA where you have until the April 15th tax-filing deadline.
There are many great articles available online covering the basics of Tax-Loss Harvesting. Many discuss specific strategies and their benefits. Here are a few of our favorites:
https://www.investopedia.com/articles/taxes/08/tax-loss-harvesting.asp
https://www.moneyunder30.com/profit-from-tax-loss-harvesting
https://www.gurtin.com/blog/municipal-tax-loss-harvesting-to-decrease-taxes/
Happy reading and Happy Harvesting!!