Crypto Taxes USA Crypto Tax Regulations

Crypto, Bitcoin: Reaping Losses with Tax-Loss Harvesting

You are long-term bullish on bitcoin and you’ve begun to accumulate Ethereum this year because you believe there’s a lot of potential behind DeFi. Unfortunately, you are under the water due to your $ETH losses, but it’s okay because you intend to hold your Ethereum in the long run. 

Year-end comes and it’s time to compute your payable taxes for the fiscal year. Your portfolio and trading activity are as follows:

Your Portfolio and Trading History

Let’s take the US as an example, but the same principles apply to Germany, Austria, and other countries that have different tax brackets for long and short-term capital gains. Your salary is $50,000 per year so the corresponding tax brackets are: 15% for long-term capital gains and 22% for your short-term capital gains.

Long-term transactions
Short-term transactions

Calculating Taxable Gains Without Tax-Loss Harvesting

Calculation for short-term capital gains (no tax-loss harvesting)
Calculation for long-term capital gains (tax-loss harvesting doesn’t apply)
Capital gains calculation

Don’t forget to add your ordinary income tax expense of $11,000, so your year-end payable tax is $49,800.

What can you do to reduce your tax liability and keep more cash in your pocket? 

Calculating Taxable Gains With Tax-Loss Harvesting

Tax-Loss Harvesting is a strategy that every successful trader should consider using. The basic mechanics behind this tool is liquidating positions in a loss to reduce year-end taxes on capital gains. So let’s return to your portfolio. You could have cut your losses on part of the $ETH allocation to reduce your bitcoin capital gains. To put the cherry on top, you could even have reduced your ordinary income tax expense with your $ETH losses (limited to $3,000).

Short-term transactions example

*Your long-term portfolio remains the same for both scenarios.

Let’s see the difference between your tax expense implementing tax-loss harvesting:

Short-term transactions calculation

The Tax-Loss Harvesting strategy implies that you sell your $ETH that is in the red (-$12,500) to reduce your tax burden.

Capital gains calculation using tax-loss harvesting

It’s clear that using Tax-Loss Harvesting, or short-term losses to offset the capital gain tax expense, can be beneficial.

Capital gains calculation without tax-loss harvesting

As you can see, if used appropriately, the strategy can result in a lower tax expense coming year-end. In our example, you would keep an extra $2,750 in your pocket that you can use to repurchase your $ETH or spend as you wish.

Comparison between capital gains with and without tax-loss harvesting

If you want more proof compare the effective tax rate of both operations.

Effective tax rate with tax-loss harvesting
Effective tax rate without tax-loss harvesting

All you need to do know is that long-term capital gains are taxed more favorably than short-term capital gains. When you have a portfolio with a greater distribution of capital (more crypto in your portfolio) tax-loss harvesting can become a hassle. You have to analyze the performance of each transaction and classify it according to the corresponding crypto and the holding period. Imagine doing the exercise for 10 crypto with over 100 transactions, luckily we have a solution for more complex cases. 

Introduction to the Tax-Loss Harvesting Dashboard (Holding Period)

Holding Period Dashboards are the best tools available for tax-loss harvesting strategies because they do all the hard work for us. The tool computes your short-term and long-term capital gains (or losses) automatically, providing a clear picture of where you stand regarding tax implications on your portfolio performance. 

Step-by-step guide to generate a crypto tax report

Simply move around the pointer along the x-axis to calculate your short-term and long-term capital gains according to your holding-period. When you go to the right, you get an idea of what the future holds for you. So, the Holding Period Dashboard predicts if your positions will be long-term or short-term for that given date in the future. holding period feature (Tax-Loss Harvesting)

Your end goal is to balance your tax expense by selling your short-term positions in a loss (your $ETH bought at $450) to reduce your long-term capital gain tax expense. But what next? How do you execute the strategy?

You can go about the hard way, converting the units you need to sell each crypto to meet your tax-loss harvesting objective and going to the corresponding exchange and wallet and liquidating the units in a short-term loss. 

The smart thing to do is to use the Holding Period Feature in, with a click of a button, to reveal your short-term and long-term capital gains (or losses) distributed by exchange or wallet. Therefore, all you need to do is go on your wallet or exchange and sell the number of units reflected on the dashboard. 

Tax-loss harvesting for different tokens per exchange/wallet

Going Back to your Portfolio

Tax-loss harvesting is profitable because you saved $2,750 by selling your $ETH.

If you are not at ease selling your $ETH because you believe that the price can spike any day, remember that you can repurchase your $ETH, following 30-days since you liquidated your position, at a lower price, so your long-term capital gains increase. Some might claim that waiting 1 month to repurchase $ETH bears a high opportunity cost, but there’s an alternative. You can buy another crypto with similar characteristics to profit until you can buy your $ETH back. Or you can simply buy your $ETH back beforehand and claim that you sold your $ETH due to US Elections volatility. 

The intelligent investor is always looking for opportunities to surpass year-end objectives and taxes can be the difference between being profitable and exceeding your profit expectations. But this surplus doesn’t come for free, extra work is required to properly execute a tax-loss harvesting objective. Luckily for you, the Holding Period feature makes the analysis fast and intuitive, especially when you have a breakdown of your positions by exchange and wallet. Seize the opportunity to outperform the market and try the best Holding Period tool available in the market. 

Was this post helpful?

Related posts

Tax Loss Harvesting Strategies – USA
Deferring Capital Gains Tax The idea behind tax loss harvesting is simple – sell positions...
bitcoin 3d logo twirling
Bitcoin Dominance and Crypto Money Flow Cycles – Altcoins, Bull Runs
Bitcoin Dominance refers to the measure of Bitcoin’s market capitalization in relation to the rest...
bitcoin ethereum 3d
Bitcoin, Ethereum, Crypto: Active vs New Addresses
Active vs. new addresses is a metric measured on-chain. We can use this metric to...