With the fiscal year ending, planning your cryptocurrency taxes may help you reduce tax liabilities on your transactions. Investors can reduce the tax imposed on them in several ways. For example, donating cryptocurrency to a non-profit can result in a tax deduction. Also, you might save money on capital gains tax by donating your assets. However, tax-loss harvesting is one of the most popular ways to reduce liabilities among investors.
What is cryptocurrency tax-loss harvesting?
Tax-loss harvesting is the practice of selling crypto at a loss to reduce any capital gains that result from selling other cryptocurrencies at a profit. The concept is to lower the overall tax obligation by offsetting capital gains with capital losses. However, the assets have to be sold, and the money received must be used to buy a similar asset within 30 days of the sale to qualify for a loss. This is known as the “wash sale” rule. This strategy can be used by investors who have put their money in several crypto assets.
The losses, however, can often only be used to offset capital gains and not other forms of income. Moreover, there are limitations and restrictions on the amount of loss that one can claim.
How does this strategy work?
Finding a cryptocurrency whose value has dropped since being purchased and selling it at a loss to offset the overall tax liability is how crypto tax-loss harvesting operates.
The Internal Revenue Service (IRS) in the United States has special tax-loss harvesting regulations. The wash sale rule is one such example. The rule forbids a person from deducting a loss from the sale of a security, if they buy the same investment within 30 days of the sale. Moreover, the IRS places a $3,000 annual maximum on the amount for capital losses that can be used to offset ordinary income.
On the other hand, the UK does not have a special wash sale law for cryptocurrency assets. Although there are some general tax concepts that might be applicable. For instance, income from the sale of assets, including cryptocurrency, is subject to capital gains tax.
Having said that, if a person sells a cryptocurrency asset at a loss, they can carry that loss forward and use it to offset earnings in the future. They can also apply it against any capital gains they have achieved in the same tax year.