Use Your Crypto Losses to Turn the Tables Against the IRS

If you’re a high earner or someone who lives in a high-tax state, you should look into tax-loss harvesting. You may be able to save up to 50% on your capital gains tax bill.

AccessTimeIconNov 16, 2022 at 3:01 p.m. UTCUpdated Nov 18, 2022 at 4:15 p.m. UTCLayer 2
AccessTimeIconNov 16, 2022 at 3:01 p.m. UTCUpdated Nov 18, 2022 at 4:15 p.m. UTCLayer 2

Jaimin Desai is the founder and CEO of Reconcile, a financial services company that builds intelligent tax experiences for fintech products.

Disclaimer: This is not tax advice, and we strongly recommend engaging with a tax professional before making any transaction.

This year has not been kind to any crypto investor’s portfolio. Fortunately, there’s one silver lining for all bag-holders with steep losses: tax-loss harvesting. Tax-loss harvesting is a tax minimization strategy in which you strategically sell at a loss to offset gains from other investments (i.e., use crypto losses to offset stock gains).

Smart investors will use this strategy wisely throughout the year to keep from accumulating excessive taxable gains in any given year, which is especially important for anyone living in high-tax states like California or New York.

Jaimin Desai is the co-founder and CEO of Reconcile. This piece is part of CoinDesk's Tax Week.

Here are a couple of things you’ll want to keep in mind about tax-loss harvesting.

When you tax-loss harvest, you maintain the same portfolio value but slightly boost your post-tax return. Here’s how it works:

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(Jaimin Desai)

As the example highlights, tax-loss harvesting helps investors maintain the same portfolio value but lowers their tax liability by offsetting gains with losses. Keep in mind that tax-loss harvesting is not always needed and is more recommended for investors with large tax liabilities or those who are taxed at higher rates.

There are no wash sales to keep in mind when tax-loss harvesting with crypto. According to the wash sale rules, the U.S. Internal Revenue Service will disallow any loss if the same exact security is bought within 30 days before or after selling. Fortunately for crypto investors, crypto is still technically viewed as property from a taxation perspective, so it’s free from the wash sale rule restrictions.

That being said, there is still another IRS rule called the economic substance doctrine, which essentially disallows transactions that are made solely for federal tax avoidance purposes. According to the IRS:

Under section 7701(o)(1), a transaction has economic substance if: (1) the transaction changes in a meaningful way (apart from federal income tax effects) the taxpayer’s economic position; and (2) the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into such transaction.

So to avoid running afoul of this doctrine, you could presumably sell and rebuy the same crypto after a few days – the logic being that since crypto is so volatile, there is enough economic substance to justify selling and then rebuying. However, selling and then rebuying immediately could definitely raise some flags.

It’s also worth noting that if you have more losses than gains this year, you can deduct up to $3,000 (or $1,500 if married and filing separately) in investment losses against your ordinary income when filing taxes. Realized losses above these limits can be used to offset gains in future years, too.

The IRS lets you lower your ordinary income (i.e., your wages) by deducting your investment losses against it. So if you made $100,000 in 2022, you can lower your taxable income by up to $3,000 – to a new total of $97,000. Depending on what your marginal tax rate is and the state you live in, you could potentially save at least $1,000 in taxes just by realizing your investment losses.

Investments that are reported on Schedule D of your tax return include stocks, bonds, crypto, collectibles and homes. So you can use losses from any of these asset classes to offset each other and get to $3,000 in deductible losses. For example, if you had $15,000 in crypto losses and $10,000 in stock gains, you would have a net loss of $5,000. You can deduct up to $3,000 and then use the remaining $2,000 in losses to offset gains in 2023 and beyond.

To summarize, tax-loss harvesting using crypto is one of the best and most accessible investment strategies anyone can take. If you’re a high earner or someone who lives in a high-tax state, you should look into tax-loss harvesting, as you may be able to save up to 50% on your capital gains tax bill. Also, before engaging in any transaction, be sure to talk to a professional who knows your entire situation and can better advise you on the right decision.


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Jaimin Desai is the founder and CEO of Reconcile, a financial services company that builds intelligent tax experiences for fintech products.

Jaimin Desai is the founder and CEO of Reconcile, a financial services company that builds intelligent tax experiences for fintech products.