Tax-loss harvesting is a strategy that can help many investors optimize taxes they may owe on capital gains or, in some cases, ordinary income. As a strategy, tax-loss harvesting involves selling an investment that has lost value, replacing it with a reasonably similar investment, and then using the realized loss to offset any realized gains. Tax-loss harvesting only applies to taxable investment accounts; retirement accounts like IRAs and 401(k) accounts grow tax-deferred so they are not subject to capital gains taxes and typically would not benefit from tax-loss harvesting.
Imagine you sold your BTC holdings earlier this year for a capital gain of $10,000. You also have ETH holdings that have an unrealized loss of $5,000. If you keep your ETH holdings through the end of the year and have no other relevant transactions, you will be taxed based on your $10,000 in capital gains from your BTC sale.
Utilizing the tax-loss harvesting strategy, you can instead sell your ETH holdings for a $5,000 loss, buy substantially similar ETH, and then use the realized losses to offset your capital gains from the BTC sale. In this scenario, the $5,000 in capital losses from ETH can offset half of your $10,000 in capital gains from your BTC sale, while maintaining similar ETH exposure.
Capital losses may also affect taxes on ordinary income, up to a limit. For example, if you have more capital losses than gains in a single year, you may be able to use up to $3,000 a year to offset ordinary income on federal income taxes, and carry over the rest to future years.
TaxBit also supports efficient tax-loss harvesting practices. Thanks to our partnership, you can take advantage of TaxBit’s expertise through the BlockFi platform. TaxBit relies on the “highest in, first out” (HIFO) method per exchange to optimize your cost basis and reduce exposure.
Neither BlockFi nor any of its affiliates or representatives provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions. Digital currency is not legal tender, is not backed by the government, and crypto interest accounts are not subject to FDIC or SIPC protections. Learn more at BlockFi.com.