What’s next for crypto?
More importantly, what’s next for your portfolio?
It doesn’t take a lot of digging to notice the market is still reeling from a significant downturn. The DOW, S&P 500, and the NASDAQ Composite all experienced dips in 2022, and cryptocurrency markets are mirroring the decline to the tune of $1T in lost value.
But now with modest gains across markets, and thankfully another death knell for crypto avoided, how do crypto investors and users mitigate the losses they incurred?
Meet crypto tax loss harvesting.
What is crypto tax loss harvesting?
Tax loss harvesting isn’t new. And it’s completely legal and thoroughly advisable. But what may be a new concept for you is how this tactic applies to offsetting crypto losses.
You probably already know the IRS allows for capital loss offsets – but did you know they also treat crypto essentially the same way they treat other forms of capital gain and loss? There are limits, and it’s not a massive allowance, but every little bit helps: “If your capital losses exceed your capital gains, the amount of the excess loss that you can claim to lower your income is the lesser of $3,000 [$1,500 if married filing separately]” (IRS, 2022).
How can you take advantage of crypto tax loss harvesting?
First, make sure you understand how liquidity works; you could lose or gain depending on how you sell cryptocurrency.
The next step: keep good records.
Easier said than done, but as a user’s crypto assets make their way around various exchanges, wallets, and forks, it’s difficult to track which events are taxable and non-taxable.
That’s why it’s imperative to track gains and losses on the right events so that when tax season rolls around, you’re prepared to offset crypto losses appropriately. This is likely going to be especially true for the 2022 tax season as crypto users and investors took quite a beating.
How do you track crypto gains and losses?
Manual tracking is going to prove burdensome and ineffective. After all, how many transactions could you possibly keep up with?
Consider an average year’s worth of basic crypto transactions:
- You use a fiat currency to purchase crypto
- That transaction passes through an exchange
- Your crypto is transferred to a new wallet
- You use that crypto to purchase a new crypto
- That passes through a different exchange
Maybe you’re also in a financially leveraged position – you used other capital to purchase crypto, adding another layer of complexity to your portfolio. Add in forks, airdrops, other wallets, additional exchanges, more fiat infusions, new crypto purchases… you get the picture. Confusion compounds and you realize quickly there’s no way to accurately monitor and record which events can save you or harm you when the tax bill comes due.
That’s where cryptocurrency tax software comes in to automate the process, accurately tracking your trades, helping you stay compliant, and making it much easier to figure out which crypto tax loss harvesting tactics could work the best for your financial situation.
BlockSentry’s portfolio tracking and monitoring makes it simple.
Instead of guessing or playing crypto transaction archaeology, BlockSentry saves users and investors the hassle of manually tracking trades and delivers a comprehensive set of tools that brings clarity to a confusing situation.
Here’s how BlockSentry works:
- Our powerful software auto-syncs with your wallets and exchanges, importing trade history, payments, and more.
- Now you can see all transactions in one place in a searchable, visual dashboard.
- Everything is organized, and BlockSentry automatically generates tax forms like US 8949 and international equivalents.
Now you’re in a position to take advantage of crypto tax loss harvesting because you have a clearer picture of what’s taxable and non-taxable.
And you’re one giant step closer to saving money on your 2022 taxes.
Pro tip: BlockSentry works great in the hands of a knowledgeable CPA – make sure to ask your accountant.