Crypto Tax-Loss Harvesting: Surviving Through the Bear Market

In recent months, the Federal Reserve has tightened its policy by significantly raising interest rates to curb high inflation. As with nearly all financial markets, the cryptocurrency market has been hit by rising interest rates and deteriorating economic conditions.

Recently, the total market capitalization of cryptocurrencies dipped below $1 trillion, the first time this has happened since January 2021. Currencies such as Ethereum and Bitcoin are at their lowest levels since December 2020. Now that we are in market territory bearish, it is time to use a strategy like cryptocurrency tax loss harvesting.

What is Cryptocurrency Tax Loss Collection?

Collecting tax losses on cryptocurrencies is a popular investment strategy that involves selling loss-making assets to effectively offset capital gains from other investments. Individuals using this tax strategy can reduce their total tax liability.

When you collect tax losses on cryptocurrencies, you can reduce the taxes you owe by selling assets for less than what you paid, which can come in handy if you have capital gains during the year. Remember that profits made can be taxed. The sale of an asset at a loss allows you to accumulate capital losses which directly offset the capital gains.

It is common for cryptocurrency investors to use this fiscal strategy at the end of a given fiscal year or when the broader market has declined significantly. If you use the right tool or software, you can reduce your taxes by collecting tax losses on cryptocurrencies.

Is it legal to collect tax losses on cryptocurrencies?

If you are concerned about the possibility that collecting crypto tax losses is illegal, the truth is that this strategy is completely legal and is not considered tax evasion. However, you need to follow special wash-sale rules if you want to use cryptocurrency tax losses correctly to reduce your income tax year.

Is there a limit on the transfer of tax losses on cryptocurrencies?

Looking at the tax laws of the US, UK, Canada and Australia, each country has different capital loss limits.

US Capital Loss Limit

The United States does not impose limits on the amount of capital losses that can actually be used to offset capital gains. Conversely, some special rules apply if the accumulated capital losses are greater than the capital gains. In this situation, you can only use $3,000 in capital losses to offset the capital gains. Residual losses can be carried forward to future tax years.

Capital loss limit in the UK

In the UK, a capital gains tax credit of £12,300 is available to any individual. If the capital gains you earn exceed the amount of the tax credit, you can use your capital losses to reduce the capital gains until they are within the deduction. There is currently no limit to the amount of capital losses you can use to collect tax losses on cryptocurrencies.

Australian capital loss limit

Capital losses can be used to offset capital gains if you live in Australia. This option has no restrictions. However, your capital losses must be used before you can carry them forward to future tax years. This means that you cannot carry forward any capital losses if there are any capital gains left.

Canada Capital Loss Limit

Canada’s power loss rules are somewhat unique in that only half of the total power loss can be recovered. However, there is no maximum amount that can be offset against capital gains. If your losses exceed your profit for the accounting period, those losses can be carried forward secondly.

How does cryptocurrency tax loss collection work?

Cryptocurrencies are considered capital assets, meaning they behave like stocks or real estate. Cryptocurrency gains or losses can only be realized after the currency has been traded, sold or used. Let’s say you currently own a cryptocurrency that has lost 50% of its value since you bought it. This is not considered a loss of cryptocurrencies until you trade or sell your holding.

Collecting your cryptocurrency tax losses is a useful strategy that can help you offset your capital gains and reduce the amount of tax you owe on your annual tax return. Remember, collection is still possible even if you have no capital gains for the year. Carrying over extra losses can also help you reduce your taxable income or potentially offset gains on stocks or other types of assets.

Let’s say you have $8,000 in capital gains this year and a certain amount of ETH that is currently worth $3,000 less than you originally paid for. If you choose to hold the current amount of ETH, you’ll have to pay taxes on $8,000 of your capital gains.

However, you can use the cryptocurrency tax loss collection strategy to collect accumulated ETH losses. With this strategy, you sell your current holdings of ETH, which could leave you with $3,000 in capital losses. Thus, your capital gain would drop to $5,000, which should significantly reduce the taxes you owe.

Benefits of collecting tax losses on cryptocurrencies

The main benefit of a cryptocurrency tax loss collection strategy is that you can reduce the tax on your capital gains. However, additional benefits are available depending on the country.

For example, you can offset part of your capital loss against your income, which could qualify you for a lower tax rate. Being in a lower tax bracket significantly reduces the taxes you pay.

However, keep in mind that accumulating cryptocurrency tax losses could prevent you from paying capital gains taxes indefinitely. The goal of this strategy is to defer these taxes. By deferring the capital gains tax, you will have more money each year to spend on cryptocurrency investments.

Risks of collecting tax losses on cryptocurrencies

While this tax strategy can be very beneficial, it also carries a number of potential risks. As long as you follow the necessary instructions for selling linen, you will not receive a visit from the tax authorities.

However, if you make a lot of cryptocurrency buying and selling, your transaction costs will increase. Depending on the exchange you use, these fees can be as high as 4% of each transaction. If you want to ensure that you are actually saving money, it is important to take these allowances into account when calculating the amount of crypto tax loss collection that will reduce your tax bill.

As discussed above, accumulating cryptocurrency tax losses does not eliminate capital gains. You’ll have to pay taxes on that profit later. When you eventually resell the cryptocurrencies you bought, you will have to pay taxes on your capital gains.

If you buy cryptocurrencies at a much lower price due to the recent drop, your capital gains could end up being much larger than expected. Depending on how large those gains are, they can actually negate your initial tax savings from this strategy.