In light of the crypto crash in recent months, anyone who invests in BTC and other digital assets should know about crypto tax loss harvesting, especially if you have significant capital gains to report for 2022.
Tax-loss harvesting is an investment strategy where you sell assets at a loss during a tax year, to offset capital gains. With stock and other securities, this strategy works only if you repurchase the same or substantially identical securities, more than 30 days before or after the sale. The 30-day rule, or so-called “wash” rule, was implemented to discourage taxpayers from abusing tax-loss harvesting by selling securities just for tax benefits.
The wash rule, however, does not apply to BTC or any other digital assets which are not classified as securities. Therefore, you can sell your crypto and instantly buy it back, maintaining the same position, while claiming a tax loss. All without the risk that the market price will dramatically increase during a 30-day waiting period.
As an example, if you purchased 10 BTC over the last several years at an average price per BTC of $40,000, and sold all of it during 2022 when the market price hit $20,000, you can claim a $200,000 offset against your capital gains during 2022, even if you immediately repurchase those 10 BTC at $20,000. Your tax basis is the $400,000 you originally invested, you sold your BTC for $200,000, hence you can claim a $200,000 loss.
I have been investing in crypto since 2017. As a result of day trading, and experimenting with Defi and NFTs, I have engaged in tens of thousands of transactions, converting in and out of various digital assets. So how did I calculate my cost basis and tax losses on tens of thousands of transactions? I did not.
All of my investments originated through depositing cash into various crypto trading platforms such as Coinbase and Binance. I dug up my old banking records and exchange deposit histories, and added all cash deposits and withdraws since 2017. I subtracted the withdrawals from the deposits to determine my cost basis. I consolidated all cryptocurrency into BTC, sold it on Coinbase (commission free) at approximately $18,000, and immediately purchased it back. My tax losses for 2022, equal my tax basis less the amount I received when I sold my BTC.
By the way, if BTC drops to $10,000 before the end of 2022, I can re-harvest, by selling and repurchasing, and obtain additional tax losses.
Note: The US law could change to apply the wash rules to cryptocurrency, and could seek to retroactively apply the rule to 2022. The content of this article should not be considered tax or legal advice, and you should consult with your CPA or tax attorney prior to engaging in crypto loss harvesting.
The information contained in this article is strictly for educational purposes and is not intended to be legal or tax advice or to be relied upon by anyone without doing their own research, and consulting with legal and tax advisors.