📖
Web3 Encyclopedia
  • Welcome aboard!
  • Source
  • 😀Evolution from Web 1.0 to Web 3.0
    • Web 1.0 Web 2.0 Web 3.0
    • Key Features
    • Current Limitations
    • Future of Web 3.0
    • Learn: What Is Web3?
    • Learn: Will Every Brand Have a Web3 Strategy?
    • Learn: Big Ideas in 2023
    • Learn: The Web3 Paradox: Why Scaling Usage Alone Won't Lead to Mass Adoption?
    • Learn: Is Web3 A Marketing Buzz or Tech Revolution?
    • Learn: What is the relationship between blockchain and Web3?
    • Learn:Empowering Women in Web 3.0: The Role and Contributions of Women in Blockchain, DeFi, and dApp
    • Learn: Web 3.0 and the Future of E-Commerce
    • Learn: 12 ways ecosystem projects can attract more developers
    • Learn: How Web3 is Impacting Education?
    • Learn: Web3 And The Future Of Digital Advertising
    • Learn: Web3’s impact on personalization, trust and engagement
    • Learn: Web3-Powered Identity Management -- Unlocking the Benefits of Decentralization
    • Learn: Why Web2 companies fail in Web3 while others made it?
    • Learn: To Identify or Not in a Web3 World?
    • 🤫[Insider Series] McKinsey x Web3
    • TL;DR 👀
  • 💲Blockchain Fundamentals
    • Why is Blockchain So Popular?
    • Introduction to Blockchain
    • Blockchain Misconceptions
    • Blockchain vs Bitcoin, Database, Cloud
    • Consensus Mechanism
    • Public and Private Keys
    • Hash Functions and Cryptography
    • Sharding
    • Types of Blockchains: PoW, PoS and Private
    • Understanding Cryptocurrency
    • Coins vs Tokens
    • Blockchain Trilemma
    • Legality
    • Learn : Google’s Cloud Based Blockchain Node Service
    • Learn: How Blockchain, Digital assets, and Web3 Unlock Financial Inclusion Globally
    • Learn: Will Chinese-Made Crypto Soar Higher?
    • Learn: What Does MiCA Mean for Crypto in Europe?
    • Learn: Unraveling the Intricacies of Blockchain Forensics and Asset Tracking
    • Learn: Promising blockchain use cases in healthcare industry
    • Learn: The Role of Blockchain in Authenticating and Provenance Art
    • Learn: Blockchain-Based Digital Identity: Benefits, Risks, and Implementation Challenges
    • Learn: The Future of Energy Supply Chains
    • Learn: Revolutionizing smart contracts and cryptocurrency
    • Learn: Nigeria goes blockchain
    • Learn: A Game Changer for Online Gaming?
    • Learn: Is blockchain technology ready for high-storage applications?
    • Learn: Will Blockchain Technology Mark a Turning Point in Fraud Prevention?
    • Learn: Why ZK-rollups need data availability?
    • Learn: How will generative AI disrupt blockchain?
    • Learn: A New Blockchain for Generative AI?
    • TL;DR 👀
  • 🏟️Web3 Utilities
    • Decentralized Applications (dApps)
    • Cross-chain Bridges
    • DAO
    • Artificial Intelligence
    • Learn: Is Community-building Essential for Web3 Startups?
    • Learn: ‘Decentralization Theater’
    • Learn: Crypto and AI- A yay or nay combination?
    • Learn: Dissecting the DAO
    • Learn: What is motivating Lido DAO to rise?
    • Learn: How to Turn Your Community Into a DAO?
    • Learn: The Key to Decentralized Decision Making
    • Learn: How Web 3.0 can disrupt the supply chain industry?
    • TL;DR 👀
  • 🪙Bitcoin
    • What is Bitcoin
    • Bitcoin's Blockchain Technology
    • UTXO Model and Transaction Fees
    • Bitcoin Mining and Mempool
    • Learn: What is bitcoin mining?
    • What are Hard Forks and Soft Forks
    • What is SegWit and the Lightning Network
    • Bitcoin Ecosystem
    • Can Bitcoin be Destroyed? Game Theory and Network Attacks
    • Learn: Crypto token supplies explained
    • Learn: What is crypto tax-loss harvesting, and how does it work?
    • Learn: Can Crypto Go Green? How to Invest in Eco-Friendly Cryptocurrencies
    • Learn: Why Did FTX Collapse? Here’s What to Know.
    • Learn: How Sam Bankman-Fried swindled $8 billion in customer money?
    • Learn: How much is Bitcoin worth today?
    • Learn: The Costs of Running a Bitcoin Node In Nigeria
    • Learn: Has 2022 Left Any Crypto Positives?
    • Learn: How Crypto Exchanges Can Be Free of Risk?
    • Learn: Greed, Lies and FTX: Is Crypto a Force for Good or Evil?
    • Learn: Is Crypto a Cultural Movement?
    • Learn: What are the consequences of crypto’s ongoing regulatory process?
    • Learn: Beyond the Crash and Embracing NFTs?
    • Learn: Understanding crypto bag holders and their mindset
    • Learn: Inscriptions: Just A Fad, Or A Real Threat To Bitcoin Becoming Decentralized Money?
    • Learn: How Bitcoin Ordinals Can Change the Future Of Mining?
    • Learn: What is a supernet?
    • Learn: Bitcoin Miners Celebrate 10 Years Since First ASIC, What Changed Since Then?
    • Learn: Bill Vs. CBDC – Why This US Congressman Wants To Block The Fed From Issuing A Digital Dollar?
    • Learn: Why Bitcoin Will Blow People’s Minds In 2025?
    • Learn: How the Howey Test Sheds Light on Cryptocurrency's Regulatory Gray Area
    • Learn: Cryptocurrency vs AI: A Complex Debate
    • Learn: Where the U.S. Government Went Wrong in Regulating Crypto?
    • Learn: The Nostr Privacy Paradox
    • Learn: Do algorithmic stablecoins have a future as centralized coins are under scrutiny?
    • Learn: Is Bitcoin Set To Revolutionize The Financial World With Its Superior Purchasing Power?
    • Learn: What is Shibarium, and what does it mean for Shiba Inu?
    • Learn: What is a crypto dusting attack?
    • Learn: Is the Adoption of Central Bank Digital Currencies (CBDCs) the Future?
    • Learn: How Artificial Intelligence Could Revolutionize Crypto?
    • Learn: What’s next for EU’s crypto industry as European Parliament passes MiCA?
    • Learn: Why the EU Has MiCA and the U.S. Has Securities Law Confusion?
    • Learn: Six New Projects Looking to Mitigate Bitcoin Mining’s Energy Footprint
    • Learn: Who on Crypto Twitter chose not to pay for a blue checkmark?
    • Learn: What is the wash-sale rule in Crypto?
    • Learn: What is Pepecoin and can it flip memecoins Dogecoin and Shiba Inu?
    • Learn: Can you recover stolen Bitcoin from crypto scams?
    • Learn: What the ‘anti-mining bill’ means for the crypto industry in Texas?
    • Learn: Does the US have a crypto ‘tax loophole’ problem?
    • Learn: How users can stay protected?
    • Learn: How Crypto Revolutionize Cheaper and Faster Transactions?
    • Learn: Can NFTs and CFDs be BFFs?
    • Learn: A PR expert’s tips for memecoin projects
    • Learn: Why politicians aren't convinced about the Digital Euro?
    • Learn: How A 90-Year Old TA Theory Predicted The Sudden Bitcoin Boom?
    • Learn: Social Trading Platforms and CFDs: A New Paradigm in Investment
    • Learn: How could the Chinese economic crisis impact Bitcoin and crypto?
    • Learn: How do they compare: Bitcoin IRA vs. traditional IRA?
    • Learn: Why Tokenized Assets Are Safer During a Banking Crisis?
    • TL;DR 👀
  • 🛢️Ethereum
    • Bitcoin vs Ethereum
    • What can Ethereum do?
    • What is Ether (ETH)?
    • What's Unique About ETH?
    • What are Smart Contracts?
    • Energy Consumption?
    • Ethereum Virtual Machine (EVM)
    • Pros & Cons of Smart Contracts
    • Decentralized Applications (dApps)
    • Ethereum Token Standards (ERC-20, ERC-721 and ERC-1155)
    • Evolution of Ethereum
    • How to Get Your First Ethereum
    • Learn: Next Ethereum Upgrade — Shanghai Upgrade
    • Learn: Tipping Scale for Crypto Adoption: Usability vs. Accessibility
    • Learn: Major Publicly Traded U.S. Bitcoin Miner Files For Chapter 11 – Impact On The Market?
    • Learn: 5 altcoin projects that made a real difference in 2022
    • Learn: How Tether Can Be a More Stable Stablecoin?
    • Learn: Are the Ethereum Killers Still Deadly?
    • Learn: What Ethereum Tech Trends Are Weathering the Bear Market?
    • Learn: How Ethereum’s token burns are making it a deflationary cryptocurrency?
    • Learn: A few things to know about Ethereum's Shanghai Upgrade
    • Learn: The Role of Enterprise Ethereum
    • Learn: Understanding Layer 2 Scaling Solutions for the Ethereum Network
    • Learn: The Battle of Giants: Bitcoin vs Ethereum
    • Learn: Cryptography, Smart Contracts and Distributed Networks
    • Learn: The Memecoin Grift and How It Threatens Ethereum Culture
    • Learn: What Is Ethereum’s ‘Data Availability' Problem, and Why Does It Matter?
    • TL;DR 👀
  • 👛Wallet
    • What is a Blockchain Wallet?
    • Hardware / Software Wallet
    • How to Get Your First Cryptocurrency
    • Setting up Metamask Wallet
    • Learn: How to connect the Avalanche network to MetaMask?
    • Learn: How to pass on your crypto when you die?
    • Learn: What are hierarchical deterministic (HD) crypto wallets?
    • Learn: Pros and Cons of Digital Wallets
    • Learn : How Web 3.0 Wallets Are Redefining Digital Asset Security?
    • Learn: Open source: Buzzword or real security for crypto wallets?
    • TL;DR 👀
  • 🌕New & Rising Protocols
    • Binance
    • NEAR
    • Solana
    • Fantom
    • Polygon
    • Cardano
    • Polkadot
    • Cosmos
    • Harmony
    • Cronos
    • Optimism
    • Terra
    • Who Will Win the L1 Wars?
    • Learn: New Layer 1 Blockchains Are Expanding the DeFi Ecosystem But No Eth Killers Yet
    • Learn: Is an Increased Focus on Layer-2 Scaling and ZK Technology Justified?
    • Learn: What Are the Stakes in the SEC vs. Ripple Case?
    • Learn: What is The Graph, and how does it work?
    • TL;DR 👀
  • 📈Decentralized Finance (DeFi)
    • CEX vs DEX
    • CeFi vs DeFi
    • Algorithmic Stablecoins
    • Airdrop
    • Liquidity Pool
    • Impermanent Loss
    • Swapping
    • Wrapped Token
    • Arbitrage Opportunities
    • Staking
    • Yield Farming
    • Total Value Locked (TVL)
    • Gas Fees
    • Lending & Borrowing
    • Useful Tools
    • Activity: Uniswap & Pancake Swap
    • Learn: Automated Market Makers (AMMs) in DeFi
    • Learn: Crypto Moving towards ESG: What Is Regenerative Finance (ReFi)
    • Learn: What Is dYdX? Understanding the Decentralized Crypto Exchange
    • Learn: It's A Wrap - DeFi in 2022
    • Learn: Why DeFi should expect more hacks this year?
    • Learn: The Security Challenges of DeFi
    • Learn: The Promising Future of Decentralized Social Media on Web 3.0
    • Learn: Can CBDCs, Tokenized Deposits, Stablecoins and DeFi Coexist?
    • Learn: The Increasing Popularity of DeFi and Its Potential to Disrupt Traditional Finance
    • Learn: The future of DeFi is ReFi
    • Learn: DeFi aggregation
    • TL;DR 👀
  • 🙈Non-Fungible Token (NFT)
    • What are NFTs?
    • Case Study
    • Storage
    • Who are the Players?
    • NFT Marketplace
    • NFT Useful Resources
    • Activity: Mint Your Own NFT
    • Learn: How You Can Prevent Hackers From Stealing Your NFTs?
    • Learn: What Is an NFT Floor Price?
    • Learn: Should Bored Ape buyers be legally entitled to refunds?
    • Learn: China’s view of NFTs different from rest of the world’s
    • Learn: NFTs IRL: How Digital Collectibles Are Forging Offline Experiences
    • Learn: How NFT Brands Can Cut Through The Noise
    • Learn: How Web3 disrupts the music sector?
    • Learn: Unlockable content in NFTs
    • Learn: Why Meta Matters in NFTs?
    • Learn: Should NFT Marketplaces Become Centralized?
    • Learn: Hermès vs. MetaBirkins: The NFT Case That Could Have Major Trademark and Artistic Consequence
    • Learn: What are phygital NFTs, and how do they work?
    • Learn: What is NFT ticketing and how does it work?
    • Learn: Why Solana NFT marketplace is seeing less active users?
    • Learn: NFTs and Intellectual Property
    • Learn: How AI Is Changing Artistic Creation and Challenging IP Laws?
    • Learn: The Future of NFTs: Exploring Dynamic NFTs and Their Versatile Use Cases
    • Learn: NFTs in the event and ticketing industry
    • Learn: What is NFT rarity, and how to calculate it?
    • Learn: What happens to your NFTs when you die?
    • Learn: Dogecoin-Like Spike in Milady NFTs After Elon Musk’s Tweet, But Will It Last?
    • Learn: What are NFT royalties, and how do they work?
    • Learn: How developers aim to store crypto inside NFTs?
    • Learn: Generative Art NFTs: What Are They & Why Are They So Popular?
    • TL;DR 👀
  • 💗Metaverse
    • What is the Metaverse?
    • Metaverse Economy
    • Metaverse Companies
    • GameFi
    • Learn: Are We in the Metaverse Yet?
    • Learn: Can the Metaverse exist without blockchain?
    • Learn: Can the Metaverse Facilitate Sustainable Growth of Defi Systems?
    • Learn: What is the role of biometrics in the metaverse?
    • Learn: Can metaverse be the future court?
    • Learn: Metaverse Fashion Is on the Rise, but for Whom?
    • Learn: Sustainability in the Metaverse: Challenges and Opportunities
    • Learn: How To Build A Responsible Metaverse?
    • Learn: What is a VTuber, and how do you become one?
    • Learn: How proof-of-identity provides human experiences?
    • Learn: The “Metaverse” Next Frontier for Business: Impact And Challenges
    • Learn: The 5 Biggest Misconceptions About The Metaverse
    • Learn: Why culture and ownership are critical to the metaverse?
    • TL;DR 👀
  • 👾Career in Web3 (coming soon)
    • Developers
    • Moderators
    • Community Managers
    • UI/ UX Designers
    • Digital Fashion Designers
  • 🌱Sustainability (Coming Soon)
    • Industry Effort
    • Co-author
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On this page
  • What is crypto tax-loss harvesting?
  • How does crypto tax-loss harvesting work?
  • Risks of tax-loss harvesting in crypto
  • How to reduce your crypto tax bill?
  • How to report crypto losses on your taxes?
  1. Bitcoin

Learn: What is crypto tax-loss harvesting, and how does it work?

Crypto tax-loss harvesting is a strategy used by investors to offset capital gains in their crypto investments by selling losing positions at a loss.

PreviousLearn: Crypto token supplies explainedNextLearn: Can Crypto Go Green? How to Invest in Eco-Friendly Cryptocurrencies

Last updated 2 years ago

Crypto tax planning can help optimize taxes by identifying opportunities to minimize tax liability on cryptocurrency transactions. For instance, donating cryptocurrency to a charitable organization can provide a tax deduction and also avoid capital gains tax on the donated assets.

Crypto tax-loss harvesting is another strategy that cryptocurrency investors use to reduce their overall tax liabilities. This article will discuss the concept of tax-loss harvesting strategy, how it works and the challenges involved.

What is crypto tax-loss harvesting?

Crypto-tax loss harvesting is a tax strategy that involves selling a cryptocurrency at a loss in order to offset any capital gains that may have been incurred from selling other at a profit. The idea is that by , the overall tax liability is reduced.

Nonetheless, in order to claim a loss, the assets must be sold, and the proceeds must be used to purchase a similar asset within 30 days before or after the sale. This is known as the “wash sale” rule. Moreover, crypto tax-loss harvesting strategies can be used by individuals or businesses that have invested in multiple cryptocurrencies and are looking to minimize their tax burden.

However, in most countries, the losses can only be offset against capital gains and not against other types of income. Additionally, there are limits and restrictions on how much loss can be claimed and in which tax year it can be claimed.

In the United States, the Internal Revenue Service (IRS) has specific tax-loss harvesting rules including the wash sale rule, which prohibits an individual from claiming a loss on the sale of a security if they purchase the same security within 30 days before or after the sale. Additionally, the IRS limits the amount of capital losses that can be offset against ordinary income to $3,000 per year.

On the contrary, the United Kingdom does not have a specific wash sale rule for crypto investments, but there are general tax principles that may apply. For instance, the made from selling assets, including cryptocurrencies.

That said, if an individual sells a crypto asset at a loss, they can offset that loss against any capital gains they have made in the same tax year or carry it forward to offset against gains in future tax years.

However, if an individual repurchases the same or a similar crypto asset within a short period after selling it at a loss, this may be considered “bed and breakfasting,” and the loss may not be allowed as a deduction.

How does crypto tax-loss harvesting work?

Crypto tax-loss harvesting works by identifying a cryptocurrency whose value has decreased since it was purchased and then selling it at a loss to reduce the overall tax liability. To understand how to use tax-loss harvesting in crypto, the following steps may help:

  • Identify cryptocurrencies whose price is declining: Look through your portfolio and identify any cryptocurrencies that have decreased in value since you bought them. This will be the cryptocurrency that you will sell to realize a capital loss.

  • Determine the capital loss: Calculate the difference between the purchase price and the sale price of the cryptocurrency you identified in step 1. This will be your capital loss.

  • Offset capital gains: Use the capital loss to offset any capital gains that have been made from selling other cryptocurrencies. This will reduce your overall tax liability.

  • Timing: Timing is important in this strategy; you can offset capital gains from the same tax year or carry the losses forward to the next tax year.

  • Keep records: Keep records of all the transactions related to the tax-loss harvesting strategy, as you will need to provide them to the tax authorities.

Risks of tax-loss harvesting in crypto

Tax-loss harvesting in crypto can be a useful strategy for reducing overall tax liabilities, but there are also several risks associated with it. Here are a few examples:

  • Wash-sale rules: As noted earlier, in some countries, the tax code includes wash-sale rules that prohibit claiming losses on the sale of a security if a substantially identical security is purchased within 30 days before or after the sale. This can limit the ability to use tax-loss harvesting effectively.

  • Lack of knowledge: Not having enough knowledge of the crypto market and the specific tax laws and regulations in your country may lead to mistakes and potential penalties.

Considering the above risks, it is essential to weigh the potential benefits of tax-loss harvesting against the risks and consult with a tax professional before implementing this strategy.

How to reduce your crypto tax bill?

  • Tax-loss harvesting: As explained earlier, selling a cryptocurrency at a loss can be used to offset any capital gains that may have been incurred from selling other cryptocurrencies at a profit. This can be used as a tax strategy to lower the overall tax liability.

  • Holding period: In many countries, short-term capital gains, which are gains on assets held for less than a year, are taxed at a higher rate than long-term capital gains. Holding your cryptocurrency for more than a year can result in lower taxes.

  • Charitable donations: Donating cryptocurrency to a qualified charity can be tax-deductible and can also be a way to dispose of appreciated assets without incurring capital gains taxes.

  • Tax deferral: Some countries allow individuals to defer paying taxes on crypto gains by rolling them over into a qualified opportunity fund (QOF) or a similar exchange. Any investment vehicle (other than QOF) that retains at least 90% of its assets in qualified opportunity zone property and is set up as a corporation or partnership for the purpose of investing in such property is referred to as a qualified opportunity fund.

While reducing one’s crypto tax bill is an important consideration, it shouldn’t be the sole focus when investing in crypto assets because tax laws related to cryptocurrencies are still evolving and can be complex to understand. Also, if someone engages in illegal activities, such as tax evasion or money laundering to reduce their crypto tax bill, it could lead to legal issues and severe penalties.

How to report crypto losses on your taxes?

The process for reporting crypto losses on one’s taxes may vary depending on the country they live in, but here is a general overview of the steps one may find helpful:

  • Keep detailed records of all your crypto transactions, including purchase and sale dates, prices, and amounts. This will be useful when calculating capital gains and losses.

  • For each crypto transaction, calculate the difference between the purchase price and the sale price. If the sale price is lower than the purchase price, the difference is considered a loss.

  • In most countries, users will need to report their cryptocurrency losses on their income tax return, while in some countries, they may need to file additional forms or schedules specifically for reporting crypto losses.

  • If a user incurred more losses than gains, they can claim the losses on their tax return to offset any capital gains.

  • Keep all documentation and records of your crypto transactions in case the tax authority requests them.

Regardless of the above steps, cryptocurrency tax professionals may help understand the process and requirements specific to one’s jurisdiction due to different tax regulations in various countries.

Short-term vs. long-term gains: In many countries, short-term capital gains, which are gains on assets held for less than a year, are taxed at a higher rate than . If you engage in tax loss harvesting and buy back the same cryptocurrency within 30 days, you may end up with short-term capital gains, even if you originally held the asset for a longer period of time.

Market fluctuations: Cryptocurrency prices are known to be highly volatile and can be affected by various market conditions, events and . If the price of the cryptocurrency an individual sold at a loss increases shortly after the sale, they may have missed an opportunity to .

Complexity: Tax laws related to cryptocurrency are still evolving and can be complex to understand. In the United States, for example, the Securities and Exchange Commission has issued guidance stating that some may be considered securities and, therefore, subject to federal securities laws. Additionally, there are also state-level regulations that may apply, making it challenging for companies looking to conduct an ICO.

There are several ways to , as explained below:

Using tax-advantaged accounts: Some countries allow individuals to hold cryptocurrency in tax-advantaged accounts, such as a . This can provide significant tax benefits.

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cryptocurrencies
offsetting capital gains with capital losses
capital gains tax is applied to profits
long-term capital gains
regulations
make a profit
initial coin offerings (ICOs)
reduce your crypto tax bill
self-directed IRA or 401(k)