Wallet in the red? How tax-loss harvesting can help stem the pain

0
142

Crypto investors — especially those who bought to the top of the market in 2021 — may be able to find salvation through a tax-saving strategy called “loss harvesting” according to Koinly’s tax chief .

Koinly is one of the most used crypto tax accounting firms online. Tax chief Danny Talwar told UKTN that while most retail investors are aware of their obligation to pay capital gains tax (CGT) when they make a profit, many are unaware that the opposite is true. true and that the losses can be used to reduce their overall tax bill. offsetting capital gains elsewhere.

“Most people are familiar with the concept of tax on earnings […] But what they don’t realize is that they can post that loss on their tax return and then offset it against the gains.

Harvest loss

Loss-making harvesting, also known as tax-loss harvesting or tax-loss selling, is an investment strategy in which investors sell, trade, spend, or even bid an asset that has fallen into the red – also known under the name of “assignment” – allowing them to “realize a loss”. Investors typically do this in the final weeks of the tax year, which is currently the case in Australia. Talwar notes that the strategy works in many jurisdictions with similar CGT laws, including the United States.

See also  Core Scientific sold $167 million in bitcoin holdings in June

“Countries like the UK, US and Canada either follow very similar capital gains tax regimes to Australia or have some kind of loss harvesting,” he said.

The concept is also embraced by traditional investors in stocks, bonds and other financial instruments. In the world of crypto, a loss can be realized by converting it to fiat or simply trading for another crypto token on the exchange.

Talwar believes that the influx of new crypto investors over the past few years will likely have produced a number of loss-making portfolios given the current bear market.

“Many crypto investors entered the market around 2020 and 2021 […] what this means is that the majority of these people are actually going to sit on losses, so their portfolios are in the red.

Will it work?

Talwar noted that there are specific nuances in each country’s tax regime, such as the treatment of “wash sales,” which could impact an investor’s ability to benefit from the harvest of tax losses, and suggested that investors contact their accountants to see how best to execute this strategy.

See also  dYdX announces plans to build a standalone Cosmos-based blockchain

“A wash sale basically means that you sell the same asset and buy it back within the same amount of time, just to post a loss for your tax return.”

This is illegal in some countries where the tax authorities may prevent the claimant from realizing a tax loss.

Koinly has released guidelines explaining how the rules around wash sales may differ from country to country.

As a general rule, Talwar suggests that anyone with a portfolio in the red should think about harvesting losses.

“The more relevant point is that if you made a sale in the tax year and you sold at a loss, there’s basically a benefit that people could miss out on if they don’t put it in their tax return. ”

An “extreme exception” to the case would be if an investor’s portfolio contained only loss-making cryptocurrencies and nothing else. In this case, they will have no gain to compensate.

Related: Taxes are the main concern behind Bitcoin wages, says Exodus CEO

“They should talk to their accountant, do they have other assets that they can offset a lot with? You know, there’s no point acknowledging a loss if crypto is your only investment, you have 99.8% of your savings in the bank and you’ll never invest again.

See also  Australian Mayor Downplays Crypto Volatility, Recommends It For Rate Payouts

The tax authorities are catching up

Talwar believes that while global tax authorities have made tremendous strides over the past three years to keep up with the rapidly changing crypto industry, there is still a lot to catch up on as more and more investors from retail are crowding into the market and accessibility to crypto continues to increase.

“Three years ago, it was rare for a tax authority to actually have some type of crypto advice. And the crypto space three years ago is a completely different beast than it is now. It has become much easier to buy and sell cryptos for everyday investors.

However, Talwar noted that “few” tax authorities have yet issued guidance on how investors can record and report the use of decentralized finance (DeFi) protocols despite their high adoption in 2020.

“The UK is probably leading the way in some respects as they have just released guidance on decentralized finance. Few tax authorities have issued guidelines on DeFi.