What is crypto tax-loss harvesting, and how does it work?

Crypto tax planning can help optimize taxes by identifying opportunities to minimize tax liability on cryptocurrency transactions. For instance, donating cryptocurrency to a charitable organization can provide a tax deduction and also avoid capital gains tax on the donated assets.

Crypto tax-loss harvesting is another strategy that cryptocurrency investors use to reduce their overall tax liabilities. This article will discuss the concept of tax-loss harvesting strategy, how it works and the challenges involved.

What is crypto tax-loss harvesting?

Crypto-tax loss harvesting is a tax strategy that involves selling a cryptocurrency at a loss in order to offset any capital gains that may have been incurred from selling other cryptocurrencies at a profit. The idea is that by offsetting capital gains with capital losses, the overall tax liability is reduced. 

Nonetheless, in order to claim a loss, the assets must be sold, and the proceeds must be used to purchase a similar asset within 30 days before or after the sale. This is known as the “wash sale” rule. Moreover, crypto tax-loss harvesting strategies can be used by individuals or businesses that have invested in multiple cryptocurrencies and are looking to minimize their tax burden.

Related: Cryptocurrency tax guide: A beginner’s guide to filing crypto taxes

However, in most countries, the losses can only be offset against capital gains and not against other types of income. Additionally, there are limits and restrictions on how much loss can be claimed and in which tax year it can be claimed. 

In the United States, the Internal Revenue Service (IRS) has specific tax-loss harvesting rules including the wash sale rule, which prohibits an individual from claiming a loss on the sale of a security if they purchase the same security within 30 days before or after the sale. Additionally, the IRS limits the amount of capital losses that can be offset against ordinary income to $3,000 per year. 

On the contrary, the United Kingdom does not have a specific wash sale rule for crypto investments, but there are general tax principles that may apply. For instance, the capital gains tax is applied to profits made from selling assets, including cryptocurrencies.

That said, if an individual sells a crypto asset at a loss, they can offset that loss against any capital gains they have made in the same tax year or carry it forward to offset against gains in future tax years.

However, if an individual repurchases the same or…