Losses in the crypto space need not necessarily be a negative thing. Using tax-loss harvesting, your cryptocurrency losses might reduce your earnings. If you want a tax refund, you need to declare your bitcoin losses. If you play your crypto portfolio cards properly, you can transform your coin losses into crypto exchange taxes wins.
Many cryptocurrencies, including Bitcoin and Ethereum, reached record highs in 2021. Those who made investments before the year 2021 saw enormous gains.
However, in 2022, this has not been the case. Given the current market, selling your cryptocurrency holdings might result in a loss. A loss may be turned into a gain on your tax return, showing that losses are not necessarily a negative thing to have. We’ll explain how tax-loss harvesting works with crypto so you can lower your tax burden this year.
In what ways does cryptocurrency affect one’s tax obligations?
The crypto market’s downturns might seem like a smack in the face, but there is a way to mitigate the financial blow: tax loss harvesting. By balancing a capital loss against a capital gain, a taxpayer may lower their taxable income. Since cryptocurrencies are considered property by the IRS, they are taxed similarly to stocks in terms of capital gains and losses.
Let’s imagine you put $10,000 into Bitcoin and sold it for $30,000 later. If you made $20,000 or more in cryptocurrency, you would owe crypto exchange taxes. If you sell your bitcoin for more than you purchased for it, you have made a capital gain. Your cost basis is the initial investment amount.
However, a capital loss occurs when bitcoin is sold for less than was spent for it. Using tax loss harvesting, you may reduce your taxable income by realizing a loss on your cryptocurrency investments.
If your losses are more than your profits, you may use the difference to reduce your taxable income by up to $3,000. We carry over annual losses into the next year. Thanks to tax-loss harvesting regulations, reducing your tax liability both now and in the future is more manageable.
Is tax loss harvesting something you qualify for?
Make sure you’re eligible for tax-loss harvesting before getting your hopes up about it. To begin, tax-loss harvesting may only be used in a taxed investment account. You can’t reap the rewards of tax-loss harvesting with bitcoin held in a self-directed IRA.
To participate in tax loss harvesting, you must also have a realized loss. Say you haven’t sold any of your cryptocurrencies yet this year, but your holdings have plummeted.
So your loss is just theoretical at this point. Until you sell your bitcoin, you will not have a realized loss. As a result, you can’t benefit from tax loss harvesting.
Create a tax win out of a coin loss
Large profits in one cryptocurrency might be balanced out by large losses in another. A person’s bitcoin losses may cancel out whatever profits they made in the stock market. You may lessen your tax burden by doing this.
Conclusion
Avoid complacency about cryptocurrency-related tax benefits. You shouldn’t have a pity party because your paper crypto portfolio took a big hit. In order to mitigate the effects of any profits in your portfolio, you have the option of either holding on to your assets or engaging in tax-loss harvesting.
Determine the optimal approach for your portfolio, and you’ll be well-positioned for success no matter what the markets throw at you. Binocs allows you to integrate your cryptocurrency exchanges at any time, from any location, and with read-only access, it will effectively compute your cryptocurrency taxes.