Can you believe that tax season is upon us once again? Whether you’re exploring crypto taxes software for assistance with your taxes or you prefer to use an experienced CPA to guide you, it’s important that you do everything possible to leverage market downturns to your advantage. This is where tax-loss harvesting comes into play.
Many people involved in cryptocurrency assume that there are no ways to minimize taxes or that claiming losses isn’t worth the work. In reality, this isn’t the case.
Let’s start with a basic definition of tax-loss harvesting. This occurs when a cryptocurrency investor sells an investment that they purchased at a higher price that current fair market value. This helps offset existing or potential future gains they receive from other investments. This means that you’re only paying taxes on the net amount of gains or losses from the positions sold, helping to lower or even eliminate your taxable gain for the year.
Of course, the main benefit to tax-loss harvesting is a tax reduction. As a recap, those who earn less than $40,000 as single-filers or $80,000 as joint filers will pay a 0% long-term capital gains tax. Those in the top tax bracket pay a 20% long-term capital gains tax while some investors might be subject to an additional 3.8% tax on their net investment income tax.
In terms of what cryptocurrency investments qualify for tax-loss harvesting, it applies to any tradable cryptocurrency because all cryptocurrency is treated as property.
You may be thinking, but what about wash sale rules? This rule prohibits investors from selling an investment that they made for a loss and replacing it with the same or a “substantially identical” investment within 30 days before or after the sale. This is technically a 61-day window and the rule also applies to assets such as stocks, bonds, mutual funds, ETFs, options, etc. However, this rule does not apply to assets classified as property, such as cryptocurrencies.
By leveraging a crypto taxes software or the guidance of a cryptocurrency tax expert, you can help identify tax-loss harvesting opportunities that you might not have otherwise noticed. Software can help automatically use your crypto transaction history to track and report on opportunities, automatically tracking how much of each coin you hold to ultimately lower your total tax liability.
Now is the time to reach out to our team at Founder’s CPA to get started! If you’re interested in learning more about crypto taxes software or how we can help lower your liability, please reach out to our team today!