{"id":11712,"date":"2022-06-20T13:41:30","date_gmt":"2022-06-20T13:41:30","guid":{"rendered":"https:\/\/nftandcrypto-news.com\/crypto\/portfolio-in-the-red-how-tax-loss-harvesting-can-help-stem-the-pain\/"},"modified":"2022-06-20T13:41:34","modified_gmt":"2022-06-20T13:41:34","slug":"portfolio-in-the-red-how-tax-loss-harvesting-can-help-stem-the-pain","status":"publish","type":"post","link":"https:\/\/nftandcrypto-news.com\/crypto\/portfolio-in-the-red-how-tax-loss-harvesting-can-help-stem-the-pain\/","title":{"rendered":"Portfolio in the red? How tax-loss harvesting can help stem the pain"},"content":{"rendered":"

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Crypto investors \u2014 particularly those that bought in toward the top of the market in 2021 \u2014 may be able to find some salvation through a tax-saving strategy called \u201closs harvesting,\u201d according to Koinly\u2019s head of tax in Australia.\u00a0<\/p>\n

Koinly is one of the most widely-used crypto tax accounting firms online. Australian head of tax Danny Talwar told Cointelegraph that while most retail investors are aware of their obligation to pay capital gain taxes (CGT) when they make profits, many are unaware that the opposite holds true and that losses can be used to reduce their overall tax bill by offsetting capital gains elsewhere:<\/p>\n

\u201cMost people are familiar with the concept of tax on gains. But, what they\u2019re not doing is realizing that they can recognize that loss on their tax return to then offset against gains.\u201d<\/p><\/blockquote>\n

Loss harvesting<\/h3>\n

Loss harvesting, also known as tax-loss harvesting or tax-loss selling is an investment strategy where investors either sell, swap, spend or even gift an asset that has fallen into the red \u2014 also known as making a \u201cdisposal\u201d \u2014 allowing them to \u201crealize a loss.\u201d Investors typically do it in the final weeks of the tax year \u2014 which in Australia is right now. Talwar notes the strategy works in many jurisdictions with similar CGT laws, including the United States. <\/p>\n

\u201cCountries like the U.K., U.S. and Canada follow very similar capital gains tax regimes to Australia or have a kind of loss harvesting,\u201d he said. <\/p>\n

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

Talwar believes that the surge of new crypto investors over the last few years will likely have produced quite a number of loss-making portfolios, given the current bear market:<\/p>\n

\u201cA lot of crypto investors got into the market around 2020 and 2021. What that means is that the majority of these people are actually going to be sitting on losses, so their portfolios are in the red.\u201d<\/p><\/blockquote>\n

Will it work? <\/h3>\n

Talwar noted there are specific nuances in each country\u2019s tax regime, such as the treatment of \u201cwash-sales,\u201d which could impact an investor\u2019s ability to benefit from tax-loss harvesting, and suggested that investors reach out to their accountants to see how to best execute this strategy. <\/p>\n

\u201cA wash sale basically means you\u2019re selling the same asset and reacquiring it in the same space of time, just to recognize a loss for your tax return.\u201d<\/p>\n

This is illegal in some countries or the tax authority could deny the claimant from realizing a tax loss. <\/p>\n

Koinly has published guidance explaining how the rules regarding wash sales can differ from country to country.<\/p>\n

As a general rule, Talwar suggests that anyone that has a portfolio in the red should be thinking about loss-harvesting:<\/p>\n

\u201cThe more relevant point is if you\u2019ve made a sale during the tax year and you\u2019ve sold at a loss, there\u2019s basically a benefit there that people might miss out on if they don\u2019t put it in their tax return.\u201d<\/p><\/blockquote>\n

One \u201cextreme exception\u201d to the case would be if an investor\u2019s portfolio only contains loss-making crypto and nothing else. In that case, they won\u2019t have any gains to offset. <\/p>\n

Related: <\/em><\/strong>Taxes of top concern behind Bitcoin salaries, Exodus CEO says<\/em><\/strong><\/p>\n

\u201cThey should talk to their accountant. Do they have other assets that they can offset a lot against? You know, there\u2019s no point recognizing a loss if crypto is your only investment, you have 99.8% of your savings in the bank and you\u2019re never going to invest again.\u201d<\/p>\n

Tax authorities playing catch up<\/h3>\n

Talwar believes that while global tax authorities have made huge strides over the last three years to keep up with the rapidly evolving crypto industry, there\u2019s still a lot to catch up on as more retail investors pile into the market and crypto accessibility continues to rise:<\/p>\n

\u201cThree years ago, it was rare for a tax authority to actually have some type of guidance on crypto out there. And, the crypto space three years ago is a completely different beast from what it is now. It\u2019s become a lot easier to buy and sell crypto for everyday investors.\u201d<\/p><\/blockquote>\n

However, Talwar noted that \u201cnot many\u201d tax authorities have yet released guidance on how investors can record and report the use of decentralized finance (DeFi) protocols despite it gaining strong adoption in 2020.<\/p>\n

\u201cThe UK is probably leading the way in some respects because they\u2019ve just released guidance on decentralized finance. Not many tax authorities have released guidance on DeFi.\u201d<\/p>\n