As crypto has taken off over the past few years, we’ve seen drastic ups and downs in the market.  When you’ve invested money into cryptocurrencies, seeing the prices dip can undoubtedly trigger panic. Do you HODL for dear life? Buy the dip? Cut your losses?

As it turns out, the market dips can actually be a positive when it comes to crypto and taxes. It’s merely a matter of moving when the market moves with a strategy called tax-loss harvesting. The concept is simple: Sell your crypto assets when in loss positions to offset your capital gains.

Michelle O’Connor is VP of Marketing at TaxBit, which provides cryptocurrency tax automation software to enterprises, consumers and government entities.

Crypto traders who take advantage of tax-loss harvesting can potentially save hundreds, if not  thousands, of dollars on their taxes. Once you understand how to move with the market, you won’t hodl through those dips again.

What is crypto tax-loss harvesting?

Crypto tax-loss harvesting is the selling of cryptocurrency assets that are in loss positions to offset capital gains.  Since every sale or trade of an appreciated asset triggers a taxable capital gain, many crypto traders find themselves owing a rather large sum of money in taxes at the end of the year.  These taxable capital gains can be offset with strategic capital losses, which is exactly what tax-loss harvesting does. 

How can you use tax-loss harvesting to minimize your crypto taxes?

Crypto tax-loss harvesting, when done right, can not only lower your tax liability, but in some cases, it can actually help you get a tax refund.  To use tax-loss harvesting to the fullest extent, keep these tips in mind:

1. Take advantage of no wash-sale rules in cryptocurrency.

Wash-sale rules prevent a taxpayer from selling a security at a loss and buying back the same asset within 30 days.  The good news for cryptocurrency traders is that wash-sale rules don’t currently apply to crypto. When the market dips, you can sell your assets at a loss and buy them back to offset your capital gains.

2. Harvest your losses year-round, not just at the end of the year.

Many people choose to harvest their losses only once a year at the end of the year. When it seems clear that an asset isn’t going to show a profit before the year ends, then they’ll consider harvesting the loss for tax purposes.

However, with crypto’s wild price swings throughout the year, that strategy leaves money on the table. Instead, take advantage of the price dips throughout the year, and you’ll reap much greater tax savings.

3. Deduct any remaining capital losses from your ordinary income.

If you have capital losses left over after netting them against your capital gains for the year, you can deduct up to $3,000 of them from your ordinary income.  And, any additional losses beyond that can be carried over to future tax years to offset capital gains. This is a great way to rake in even more savings, since ordinary income tax rates can be as high as 37%.

4. Pay attention to the holding period of the assets you are tax-loss harvesting.

Keep in mind that while tax-loss harvesting allows you to strategically defer and lessen your crypto taxes, it doesn’t allow you to skip out on taxes altogether.  For this reason, it’s important to remember that long-term capital gains are taxed at a more favorable rate than short term capital gains. If you have both long- and short-term capital gains of a certain cryptocurrency, it is more beneficial to first harvest the short-term capital losses and offset your short-term gains. You may consider holding on to your long-term capital gains to get a more favorable tax rate when you do decide to sell.  

It’s also important to note that you are only allowed to offset long-term capital losses against long-term capital gains and short-term capital losses against short-term capital gains.  After you’ve offset losses of the same type, you can use either long-term or short-term capital losses against short-term capital gains.

When you properly understand how to use cryptocurrency tax-loss harvesting, you can realize considerably more tax savings than when you hodl. By applying these tips, you’ll be able to use market dips to your advantage, and potentially even get a tax refund.

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