Reduce Your Crypto Tax Bill With Koinly’s Tax-Loss Harvesting Guide
Tax-loss harvesting allows you to claim capital losses by recognising and selling your assets at a loss. These capital losses may also be carried forward against future capital gains and even over multiple financial years.
For example, if you made $10,000 after buying and selling Bitcoin but lost $10,000 after selling your Ether, you won’t owe any tax since you broke even. This also works if you’ve had a good year in share trading, you can offset those gains with crypto losses.
However, if you have an unrealized loss and do not crystallize it by selling before the end of the current financial year, you won’t be able to take advantage of this capital loss until next year’s tax return.
Be careful of wash sales rules which prohibit selling assets at a loss to create an artificial loss this financial year and then immediately repurchasing them. To avoid this, you can swap one crypto for a different one or sell into dollars and buy another cryptocurrency.
Pay less tax by holding
There are other ways you can optimize your tax position before the end of the financial year to pay less tax overall. The easiest way to pay less crypto tax is to simply HODL.
In many jurisdictions, holding your crypto investment for longer than one year qualifies any gains as long-term capital gains. Depending on where you live, any crypto sold 12 months after purchasing is:
- Tax-free in Germany
- Discounts capital gains tax by 50% in Australia
- Taxed at lower tax rates of 0%, 15% or 20% in the US, depending on individual income over the year
Tax-free gains
Tax-free thresholds on your capital gains can help you automatically owe less tax. In the UK, individuals have a CGT allowance of up to £12,300 before paying tax. Germany has a relatively low threshold of €600, while Australians have no such allowance. If you’re in the US, the IRS states any individual’s income under $40,400 pays no Capital Gains Tax.
Knowing the tax-free maximum for capital assets in your country is a great way to help determine your crypto disposal strategy, so make sure you understand how crypto is taxed wherever you are.
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