Crypto Loss Harvesting - What You Should Know

What is Crypto Loss Harvesting?

Crypto loss harvesting utilizes the bane of every trader’s existence: loss. That is, assets which have lost their value. If you are an active crypto trader, it’s likely that you have hundreds if not thousands of unrealized capital gains. You invested in a cryptocurrency which you thought was bound to skyrocket like Ethereum or Monero, only to find that it went in the completely wrong direction.



What Crypto loss harvesting does is offset the gains you made from successful crypto picks. This decreases the amount that the IRS will tax you for.

What does Crypto Loss Harvesting look like in practice?

To illustrate, suppose you invest in three cryptocurrencies: Catcoin, Turtlecoin, and RabbitCoin. You buy 10 of each for $100, resulting in a total $300 investment.

Rabbitcoin skyrockets from $10 a coin to $100 a coin, leading to a new value of $1,000. From your initial $100 investment in Rabbitcoin, you gained $900!

Catcoin and Turtlecoin both decrease in value to $3 per coin, resulting in a new value of just $60. From your initial $200 in these cryptocurrencies, you lost $140.

By using Crypto loss harvesting, you should report both the $900 gain and $140 loss to the IRS. Now, instead of taxing you fully on your $900 gain from Rabbitcoin, the IRS will deduct your losses from Catcoin and Turtlecoin and offset the loss. $900 - $140 = $760 taxable capital gains.

What’s the catch?

As with most things, nothing is perfect. Crypto loss harvesting has one major issue: you lose out on the long-term tax rate. When you sell your coin for under a year, your capital gains is higher than if you hold onto it for over a year. If you are a long-term investor, this style of saving on taxes may not be for you.

There is a more secure way of saving money on crypto taxes, however. In our article, How to Pay ZERO Crypto Taxes, we go over exactly what you need to know to solidify your control over as much of your crypto success as you can. This process can be difficult to put into action, however, so it is highly recommended that you consult with a tax professional before making such big financial decisions. This is the best way to save your money in the long run, rather than pay the IRS for little mistakes a tax pro with 20 years of experience could handle.

Does Crypto Loss Harvesting have a limit?

You can only deduct up to $3,000 of net capital loss each tax year. This does not mean, however, that you are out of luck if you lost more than that. In fact, the IRS does allow you to carry over your remaining losses towards the next year. You can continue this until you finish reporting all your losses.

For example, if your net capital loss on cryptocurrency is $10,000, you can only deduct $3,000 from your taxes. The next $7,000 will be carried into the next year. Then the process repeats until your final year, when you have just $1,000 left in capital loss which you may deduct.

Final Thoughts

To sum things up, crypto loss harvesting is a strategy which most traders can use, and all active traders are highly recommended to use. There are some limits to how much value can be offset from your crypto taxes, but it is better to use this strategy than to miss out on tax savings. If you wish to use the crypto loss harvesting strategy more often, remember to actively monitor your cryptocurrency portfolio. Review each stock's performance, find the high performing assets, and note the stocks that you want to dump in return for a sweet tax benefit.

Still, it is best to connect with a tax professional to make sure that everything is done correctly. Let Yoke Tax handle the numbers while you reap the benefits.