It’s no secret that 2018 has been a rough year for the cryptocurrency markets. The upside to the recent market activity is that investors get to offset tax liability with their investment losses. As the year comes to a close, tax strategy should be top of mind for many crypto asset investors.

The best time to start planning for tax season is actually December, as the benefits of crypto tax loss harvesting end at the end of the calendar year. If you wait for the new year, all you can do is optimize your filing based on categorization. The smart thing to do is to actively manage your tax liability prior to the end of the tax year and one method to use Tax Loss Harvesting.

What is Tax Loss Harvesting?

Tax Loss Harvesting is a tax strategy where you sell an investment position (i.e. crypto) that has an unrealized loss in order to offset taxes on realized gains. This strategy is usually implemented to limit short-term capital gains taxes but can also be used to offset longer capital gains. Losses incurred through tax loss harvesting can also be used to offset ordinary income, but this is limited to $3,000 a year.

Tax Loss Harvesting is a very popular strategy in traditional finance. In fact, Betterment, the popular robo-advisor implements Tax Loss Harvesting as part of its investment strategy and uses this feature as a major differentiation between its platform and the other robo-advisors. Tax loss harvesting is mainly considered a tax deferral strategy but depending on your individual circumstances, it can have many benefits. Tax Loss harvesting both creates a capital loss for tax purposes in the current year and lowers the cost basis of the investments you own.

How Tax Loss Harvesting Works

The 2018 Crypto Markets have been a bloodbath and depending on where you invested, your portfolio can be deep in the red. The only benefit to this is that you can take these losses and use them to offset your tax liability. With that said, you cannot do this just by looking at the negative signs in your crypto portfolio tracker. While those losses may feel real, they are not real until you exit the position. In fact, no loss or gain is realized until you trade out of it. Until then, you are only looking at Unrealized Losses.

This all must be done before the end of the calendar year. Once the clock changes on December 31, 2018, you lose the opportunity to make these unrealized losses real in the eyes of the IRS. That’s where Tax Loss Harvesting comes in. 2018 is the optimal year for crypto investors to implement this advanced strategy.

What If I Only Have Losses and No Capital Gains to Offset?

Capital losses can be used to offset ordinary income (up to $3,000 per year). If you are team HODL and do not want to trade out of your crypto position, you can sell and repurchase the investment. Make sure you wait 30 days to do this or else you will run afoul of wash sale rules. A wash sale is when you sell a crypto position at a loss and buy it back within 30 days or less. Because of this, you have to wait 30 days or more to re-enter your position.

For those who have a longer-term horizon, selling at a loss sounds like a scary proposition, particularly if you cannot re-enter the position for another 30 days. It’s important to remember that we do not suggest selling your entire position. Given the fact that you will have some of your position available, you can obtain a BlockFi loan using the crypto you still own. You can then use the loan proceeds to purchase a correlated crypto asset, sell it after 30 days, and then re-enter your original crypto trade. BlockFi loans allows you to execute Tax Loss Harvesting with more ease and flexibility. Learn more about how BlockFi loans work.

How to Do Crypto Tax Loss Harvesting

It’s important to understand that Tax Loss Harvesting does not work the same for everyone. A crypto investor who is exploring this strategy has to consider their tax rates as well as identify their trade positions at the the trade lot level. It’s not enough to simply say that you want to sell your a losing crypto position. You need to identify which of your trades have an unrealized loss and make sure you less those and not any of the unrealized gains.

Without the proper tools, it’s very hard to execute this strategy as the data from crypto exchanges can be hard to decipher. The team at TokenTax has a Tax Loss Harvesting Dashboard tool that makes it easy. Their tool separates your unrealized losses from your unrealized gains, which makes it easy to identify what trades to trade out of to minimize your losses. Additionally, the TokenTax team provides customers with one-on-one Tax Loss advisory sessions and provides audit assistance.

Learn more about how to limit your crypto tax exposure or what to report on your crypto taxes.

Please seek an independent and personalized tax professional for financial advice before making any financial decision.