Most people have losses going into 2023 in cryptocurrency. One advantage of this is taking advantage of tax loss harvesting for crypto.
Tax-loss harvesting is a powerful tax-saving tool used by investors to minimize their total tax liability. Crypto tax loss harvesting specifically is when losses in crypto are used to offset total capital gains.
Investors can reduce their tax burden and postpone tax obligations by selling crypto assets at a loss and using the losses to offset other capital gains and ordinary income. The exact impact of this depends on how you file and how many gains you might have this year, but it’s worth knowing about before you do your taxes or talk to a crypto tax expert this year.
With most assets, you must wait 30 days to buy back a similar asset due to the wash rule, but it’s pretty easy to argue this doesn’t apply in crypto. So people might sell at a loss and then buy right back to get their loss on the books. This will also reset long-term gains back to short-term, but it is a move that can favor certain individuals doing their taxes in certain ways.
Regardless of that potential way to save, there is always the generic savings of up to $3,000 off your income taxes a year from taking up to $3,000 in losses (you can take more and spread them out over other years as well).
Crypto tax-loss harvesting is a great way to reduce your tax burden and manage risk. You can save money on paper by understanding the logic of crypto tax-loss harvesting and using it to offset capital gains and ordinary income. However, it is important to remember that taxes should always be paid when due and crypto tax-loss harvesting should not be used to evade taxes. Also, it’s important to think about your situation. In some cases taking a loss now won’t have any tax advantage. So make sure to consider your specific case and talk to an accountant if needed.