Crypto investors — particularly those that bought in toward the top of the market in 2021 — may be able to find some salvation through a tax-saving strategy called “loss harvesting” according to Koinly’s head of tax.
Koinly is one of the most widely-used crypto tax accounting firms online. 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.
“Most people are familiar with the concept of tax on gains […] But what they’re not doing is realizing that they can recognize that loss on their tax return to then offset against gains.”
Loss harvesting
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 — also known as making a “disposal” — allowing them to “realize a loss.” Investors typically do it in the final weeks of the tax year — which in Australia is right now. Talwar notes the strategy works in many jurisdictions with similar CGT laws though, including the US.
“Countries like the U.K., U.S. Canada, follow very similar capital gains tax regimes to Australia or have a kind of loss harvesting,” he said.
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.
Talwar believes that the surge of new crypto investors over the last few years will likely have produced quitea number of loss-making portfolios given the current bear market.
“A lot of crypto investors got into the market around 2020 and 2021 […] what that means is the majority of these people are actually going to be sitting on losses, so their portfolios are in the red.”
Will it work?
Talwar noted 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 tax-loss harvesting, and suggested that investors reach out to their accountants to see how to best execute this strategy.
“A wash sale basically means you’re selling the same asset and reacquiring it in the same space of time, just to recognize a loss…
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