According to crypto market intelligence firm Glassnode, 40% of Bitcoin investors will be down on their investments.
But smart crypto investors who understand tax rules know that could be a good thing! Using Tax Loss Harvesting, you can use this opportunity to decrease your taxes in the future.
Let’s break it down.
What is Tax Loss Harvesting?
Tax Loss Harvesting is an investment strategy that helps you reduce your tax bills in future years. Because crypto is seen as an asset rather than currency, when you sell your bitcoins you would normally have to pay a capital gains tax in most countries. However, if you take a loss, you can carry this over to later years and offset your profits with losses from previous years.
Let’s look at an example.
According to this bitcoin profit calculator, if you bought 1 bitcoin on 1 June, 2017 and sold it on 1 June, 2022, you would have made a gain of $29,536.67. If your income for the 2022 tax year was $150,000, you would have to pay a capital gains tax of $4,430.50 on this investment.
However, if you bought 1 bitcoin on 1 June, 2021, on 1 June 22 you would have an unrealised loss of $3,849. With tax loss harvesting, you can turn this liability into an asset.
How do you do tax loss harvesting?
Tax loss harvesting is a great investment strategy for bear markets, like the one that we are in right now.
Let’s continue the previous example.
If you bought 1 bitcoin on 1 June, 2021, on 1 June 22 you would have an unrealised loss of $3,849. Let’s say you sell your bitcoin and realise a loss of $3,849.
Then, you buy more bitcoin at a lower price. If in 2023, bitcoin doubles in price, you would be looking at a gain of about $30,000. You would have to pay a capital gains tax on this amount. However, you can use your losses from previous years to reduce your capital gains tax.
Tax loss harvesting is a great crypto bear market strategy to help you reduce your capital gains taxes in future years.
You can learn more about tax loss harvesting on Koinly’s blog.